Thank you to Rhodri Glyn, Partner at RWK Goodman, for sharing this guest blog with us for sustainability month.
Introduction
In the film ‘How Green Was My Valley’, a family steeped in the Welsh coal mining industry at the turn of the 20th century, seek a life for their youngest son beyond coal mining Focussing on the commercial letting arena of the 21st century, landlords and tenants seeking to reduce their carbon footprint can promote their environmental, social, and governance (“ESG”) goals via leases (referred to as ‘Green Leases’) containing provisions which encourage the parties to achieve optimum building energy efficiency and sustainability.
With growing pressure from organisations’ stakeholders, as well as from society at large, to adopt more sustainable business practices, reducing the environmental impact of their real estate interests has become a growing concern for corporate occupiers and landlords.
Background
There is no hard and fast definition of a ‘green lease’ and put simply, a lease can be described as a ‘green lease’ if it includes ‘green clauses’ which provide for the landlords’ and/or tenant’s adoption of environmentally friendly practices to improve the environmental impact of the building and meet sustainability requirements.
Following the government’s introduction of the MEES Regulations in 2016 as a means of addressing the energy consumption attributable to the commercial rented sector in England and Wales, and subsequent net zero targets, the onus is on landlords to ensure their buildings are suitably energy efficient so that they are not classed as substandard for MEES purposes. Subject to certain exceptions, the MEES Regulations currently require a building to have an Energy Performance Certificate rating of ‘E’ or better for it not to be classed as substandard and so it can be legally let.
In addition, organisations (both landlords and tenants) can have their own internal ESG policies for various operational purposes, and businesses seeking equity funding from institutional investors can also find that funds have ESG criteria baked into their terms. Against this backdrop, the use of green clauses in commercial leases has gained greater prominence.
How green?
There is currently no legal requirement in England and Wales for a lease to include ‘green clauses’ and there is no market standard or accepted practice around the drafting of such clauses.
There are various industry resources which provide sector specific guidance as to the drafting and purpose of green clauses within leases – from the Law Society Guidance issued in January 2023, the Better Buildings Partnership (BBP) toolkit first published in 2013, to the ‘Model Commercial Lease’ schedule of sustainability provisions, whereby green clauses are typically identified by reference to shades of green so that a dark green clause is the most onerous, requiring a significant commitment and cost to environmental matters, whilst the lighter the green, the less onerous the clause.
In terms of the coverage afforded by green clauses, they have tended to centre around sustainable practices, MEES compliance, and data sharing to measure performance in meeting the applicable sustainability targets.
However, in 2024 BBP published its updated Green Lease Toolkit, with what BBP considers to be 10 “green lease essentials” for a commercial property lease to credibly be called a green lease. While BBP is not a standard setting body, the aim of those essentials is for them to become an accepted norm for the “greenness” of leases and to encourage the industry to move beyond the most basic green clauses.
The updated toolkit contains extensive drafting of green clauses, including a number of new provisions, that can be used in leases in the UK, which basically shift the toolkit from being one that was initially designed to protect the existing levels of the environmental performance of let buildings to one that pushes parties to contractually commit to improve sustainability – e.g. the treatment of waste generated by the landlord / tenant, the use of sustainable materials in works by either party, and renewably generated electricity procurement as an express means of decarbonising energy sources.
Clean-tech / green-tech businesses who might be well placed to help with these goals would therefore be well-advised to familiarise themselves with the toolkit, as knowledge of these terms may lead to opportunities.
One area the toolkit does not address, is the issue of determining ultimate liability for costs in relation to associated works for improving the environmental performance of the building (albeit it supports the principle that tenants should contribute to such costs insofar as they result in savings for the tenant).
The cost of such works will be the most obvious concern for both parties and who foots the bill is likely to be a matter for negotiation.
Tenants will be concerned with the extent to which such associated costs will be passed onto them under the lease, and with any restrictions on tenant alterations pursuant to particular environmental compliance provisions sought by a landlord – striking the right balance between achieving sustainability goals in relation to the premises, and the costs liability / operational implications in doing so will be something for businesses seeking to occupy premises under green leases to consider depending on various applicable factors.
Why green?
The benefit of green clauses to commercial tenants is dependent on the drafting of the specific lease, with their adoption possibly led by investor or lender requirements (which can appear from the landlord and/or tenant side).
Scaling businesses who have their own ESG targets should be wary of negotiating green lease provisions in satisfaction or pre-emption of investor / client requirements – these requirements and targets are not uniform, and it is often sensible to seek to understand third party expectations (to the extent possible) before negotiating.
As another potential benefit, many ESG-minded businesses these days seek to attain B-Corp status – a well drafted green lease may be a helpful indicator of commitment to sustainability.
A strong green lease can future-proof against environmental legislation and support internal sustainability goals as well as external commitments with stakeholders.
Whilst green leases can serve to reduce future environmental related costs for tenants, they do often require up-front costs which, if not footed by the landlord, may not be appealing or viable for some tenants, particularly those with shorter term leases e.g. possibly some Tech start-ups (as opposed to more mature companies, who may have long term operational needs and/or hardware storage requirements).
Conclusion
Ultimately, parties’ appetite for sustainable provisions and costs liability will dictate the extent to which green clauses are adopted in leases, and prospective tenants will have their own concerns to that end. It is an area which is constantly developing and drafting of green clauses is likely to evolve in tune with government policy and legal requirements.
For more information on green leases and to discuss any of the topics raised in this article contact RWK Goodman Real Estate Partner Rhodri Glyn on 01174 540 572 or by emailing rhodri.glyn@rwkgoodman.com.
