It is estimated that the built environment accounts for around 37% of global greenhouse gas emissions.[1] No wonder then that governments across the world are looking at way to reduce this impact.

As the UK government aims to make Britain a clean energy superpower, the environmental efficiency of bricks and mortar has been thrust into the spotlight.

One option which has been readily adopted due to its low barrier to entry is the incorporation of environmentally responsible clauses in commercial leases. In this article we look at the uptick in the adoption of so-called “green leases” and how caution needs to be exercised before accepting any such clause in a lease.

What is a “green lease”

The term “green lease” is not one created by any legislation or regulation. Rather, it is used to describe a lease that contains obligations on the landlord and/or the tenant to work together to manage and improve the environmental performance and efficiency of a building.

Benefits of green leases

There are benefits for both landlords and tenants from improving the environmental efficiency of buildings, including:

• a reduction in the building’s running costs, reducing energy bills for occupational tenants and making it a more attractive proposition for future tenants;
• increased opportunity to demonstrate compliance with environmental, social and governance (ESG) targets; and
• future proofing the asset, ensuring it will be better placed to comply with evolving environmental legislation, thereby safeguarding its investment value in the long-term.

What makes a lease a “green lease”

Commonly referred to as “green clauses”, these provisions can vary depending on the property type and its use – there’s not a “one size fits all” approach – but the intention of the clause is to reduce the environmental impact of the property.

Whatever they look like, green clauses should always be drafted so as to be:

• Demonstrable: parties should be able to monitor compliance with the provisions objectively;
• Measurable: whether or not a party has complied with its obligations should be clear and quantifiable; and
• Enforceable: where they impose a legal obligation, the other party should be able to enforce compliance, just like with any other covenant in a lease.

Examples of Green Clauses

Green clauses tend to fall into two categories: those that are statements of intent setting out what the parties will try to achieve, without legal obligation; and those that are legally binding and enforceable.

It goes without saying that it is important to ensure that you are able to comply with any legally binding covenants you commit to, but that does not mean you should disregard the non-binding obligations – a new lease represents the start of a long-term relationship between landlord and tenant, so it is important to treat every covenant in the lease as a statement of intent, compliance with which is more likely to foster good will and a more productive partnership between landlord and tenant.

Most of the non-legally binding green clauses we are currently seeing are designed to encourage the parties to work collaboratively to improve the overall environmental performance of the building, often by committing to reduce energy consumption or increase rates of recycling.

In larger buildings, for instance, the landlord might also want to create an environmental forum and oblige all occupational tenants in the building to attend by way of a representative, with the aim of coming up with building-specific strategies to mitigate the impact on the environment and encourage more sustainable practices in a collaborative way.

As for the legally binding covenants, it is becoming commonplace for tenants to be obligated to provide details of their energy consumption to the landlord and their environmental consultants. In these circumstances, tenants may wish to consider imposing confidentiality undertakings in respect of any such information disclosed, such that their electricity bills do not become a matter of public record!

We have even seen a landlord try to slip into a lease an obligation on the tenant to ensure that any new fixtures and fittings they install at the property during the lease term are top rated for their energy efficiency.  Not only does this have the potential to massively restrict the tenant’s choice, but it is likely to lead to much higher maintenance costs over the lifetime of the lease.  The canny, well-advised landlord might back this obligation up with a right to require the tenant to leave any such fixtures and fittings in the property at the end of the lease, thereby increasing the chance that they will receive a more energy efficient property back than they let out at the start of the lease!

Conclusion

Whilst improving environmental efficiency is likely to be high up the agenda, both tenants and landlords need to take care to ensure that any cost implications are properly thought-through, costed and sustainable for both parties over the entire lifecycle of the lease.  Tenants in particular need to remain alert to attempts by the landlord to push a disproportionate level of cost onto the tenant for material improvements to the fabric of the building from which the tenant will only gain tangential and transitory benefit.

In theory green leases should be mutually beneficial for both landlord and tenant – where the only winner is the planet.  The aim of the game is ostensibly to reduce the impact on the environment, not for one party to gain a commercial advantage over the other…or is it?  We are starting to see green clauses deployed so as to weaponise them for commercial gain.

It will be interesting to see the extent to which contracting parties seek to exploit green clauses to their own advantage, as, for better or for worse, that certainly seems to be the current direction of travel.

[1] UN Environment Programme & Yale Centre for Ecosystems + Architecture, September 2023.