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.

Pannone Corporate has advised multi-concept operator, Mission Mars, on the letting of a flagship London site, as part of an ambitious expansion plan for 2023/24.

The Manchester firm acted as legal adviser to the hospitality company on the acquisition of a prominent 20,000 sq ft building on Shaftesbury Avenue, Trocadero. The site will be transformed into the latest Bavarian-style beer palace, Albert’s Schloss – one of a number of new openings planned for this year and next.

The Pannone team was led by Real Estate partner, James Wynne and included Senior Associate James Brandwood and paralegal Harry Jenkins.

James Wynne said: “Mission Mars operates some of the most iconic bars, restaurants and event venues in Manchester, but over the last few years has extended its portfolio beyond the North West under its highly successful Albert’s Schloss and Rudy’s brands.

“The opening of its flagship bar and restaurant on the equally iconic Shaftesbury Avenue, is an exciting milestone for the company – one of a number of regional operators which have set their sights on London as part of their strategic growth. It demonstrates the wealth of potential that exists for Manchester leisure and hospitality operators, as well as the wider appeal of brands such as Albert’s Schloss on a national level.”

James has worked alongside BGF-backed Mission Mars since 2018, with the firm acting for the company on a number of real estate deals. This includes advising on conditional agreements for leases, leases and all ancillary documentation.

The Pannone Real Estate team works with a number of high-profile names, such as Boohoo, Bestway, and Junkyard Golf. Pannone recently advised the crazy golf brand on the letting of its second London site – its biggest location to date.

The Manchester firm acted as legal adviser to the competitive socialising brand on the acquisition of a prominent 19,500 sq. ft. building in the heart of Camden Town. The former Shaka Zulu restaurant will be transformed into an immersive crazy golf experience and will be the company’s seventh site opening. This includes its flagship venue on First Street in Manchester, Liverpool, Leeds, Oxford, Shoreditch in London, and Newcastle.

Wynne added: “We’re delighted to be working alongside such exciting North West brands as they extend their footprint across key cities in the UK. The London site openings are another significant step forward for Junkyard Golf and Mission Mars and demonstrate the vibrancy and potential that exists in the regional leisure and hospitality industry.”

In our latest My Life in Law, we speak to new recruit, Emma Hafez, who joined Pannone in April 2021 as part of our Real Estate team. 28-year-old Emma talks about her career so far and why she decided to join the firm earlier this year after taking a career break to have children.

Tell us a little bit about your career, before joining Pannone.

My route into law was the traditional route. In all honesty, this was the only one I really knew about. At college we had to lay out our career paths and this was the route I chose and stuck to.

I did a three-year degree in law, followed by the Legal Practice Course and then entered into a training contract with brief stints of working as a paralegal in between.

Prior to joining Pannone, I qualified and worked as an immigration and human rights solicitor, before taking a career break to have to have my two children, Ella and Oliver. It was during this time that I decided to pursue a career in commercial law.

Why did you decide to join the firm?

My partner is the managing director of a property development company in Liverpool. He’s genuinely passionate about his work and we often discuss it together in the evenings. As a result of this interest, I felt it was the logical step for me to pursue a career in Real Estate law.

What does a typical day look like?

Every day is completely different, as the work that we do is so varied. However, a typical day usually starts with a call with my supervisor to go through the day’s tasks, followed by liaising with clients and the other side’s solicitors in relation to large developments, leases, residential investment transactions and a whole variety of work.

What is the most satisfying aspect of your job?

I really enjoy getting positive feedback from satisfied clients which I get a great sense of achievement from.

What can lawyers / the legal profession do to better support clients?

I believe solicitors could always be more empathetic to clients, as I have the benefit and perspective of seeing the client’s point of view first hand and can appreciate the challenges faced from both sides.

Looking forward, what are your career ambitions?
I hope to be able to stay at Pannone and grow an impressive client portfolio.

If you were managing partner for the day, what’s the first thing you would do?

I would take all of the teams on a city centre canal party cruise!

What would you be doing if you didn’t have a career in law?

I’ve always said I would have enjoyed being a dentist.

What do you enjoy doing outside of work?
I enjoy taking my children on days out to the zoo or farms, anything which is outdoors.

In the complex and often costly world of property development there are various potential restrictions on the progression of a property developer’s best laid plans. Restrictive covenants can rank right up there in terms of both costs and navigation with potentially severe consequences of breaches. Understanding restrictive covenants and how to tackle them is vital right from the start of any new commercial property venture. 

What is a Restrictive Covenant? 

A restrictive covenant is a control imposed on the use or development of a certain piece of land. They can date from decades and even hundreds of years ago and are meant to ensure the continued enjoyment of the neighbouring land. In modern times restrictive covenants have morphed into a many faceted tool for the crafty, and a barb for the unwary. 

As indicated by the word “restrictive”, restrictive covenants have a negative rather than a positive implication. They will state what cannot be done rather than what a land owner should do. 

For commercial real estate, restrictive covenants can be implemented in many ways. They can restrict the activity of tenants by the landlord or a lender can use a covenant to restrict activity on the property while the owner owes money. These covenants can be written into a property deed, either for a set amount of years or on an indefinite basis. 

Restrictive covenants can also operate in ways that you might not expect. They can restrict opening times, stop certain types of business from operating on the land (prohibitions on selling alcohol, for example), or prevent parking of commercial vehicles on the property. All of which can be potentially damaging for the smooth running of a business, not to mention the possible implications of preventing healthy commercial competition.  

Challenging Restrictive Covenants – is it worth it? 

There are a few options available to those wishing to challenge a restrictive covenant.  Challenges may be based on the premise that the restrictive covenants are not valid, that they are not enforceable or that they are contrary to the law or updated legal policies. For example, restrictive covenants against competing businesses opening in nearby premises may fall foul of competition laws.

A variation of the covenant could be negotiated by an express release between the parties. Alternatively, the subjected party may apply to the Upper Tribunal for modification or removal of a restrictive covenant, though this can take much longer and be much more expensive to resolve. 

Another option for those with less time, and shallower pockets, is obtaining indemnity insurance for the intended breach. Policies can be obtained for a one off fee and can provide cover for landowners, lenders and tenants under one policy. A key point to note here is the cost saving property developers will make if they obtain their insurance prior to the commencement of any planning application. Once planning has been granted the cost of a policy is invariably much higher than a pre-planning policy would have been. 

For more information about restrictive covenants and its impact on your commercial real estate, get in touch with the Pannone Corporate team. Either call on 0800 131 3355 or by filling out the contact form.