The impact on charity tenants of green leases
Cop 26 was a game changer. It seemed that almost overnight corporate Britain started to “walk” its ESG/sustainability “talk”. Ominously however, Big Business has started to push its sustainability ambitions down the line to its suppliers and corporate partners (including their nominated charities), in order to demonstrate more holistic compliance with its ESG (environmental, social and governance) commitments.
The fact that the built environment (offices, retail outlets, warehouses, residential accommodation, etc) represents almost 40% of society’s carbon emission highlights why net zero is proving such an important issue and one which will start to impact all charities:
- Directly, in relation to their own carbon footprint.
- Indirectly in relation to ensuring a charity’s sustainability performance underpins its fundraising strategies - especially when targeting larger companies for whom ESG is a major corporate issue (especially financial and international corporations).
A fast growing declaration of “green intent” on the charity sector’s agenda in recent years is the emergence of “green leases”.
Environmental obligations
A green lease is a lease which includes a range of environmental obligations, energy efficiency benchmarks and eco-centric sustainability programmes agreed between a landlord and a tenant. The obligations are designed to encourage both the landlord and the tenant to reduce the environmental impact of ownership and occupancy of a property – thereby making it more sustainable.
Green leases incorporate clauses which have a direct impact on specific responsibilities/obligations on both the landlord and the tenant. These obligations refer to the sustainable building management and occupation of a property. Clauses include issues such as energy efficiency measures, waste reduction/management and efficient water management.
However, given the fact that every building is different (in terms of age, construction, energy efficiency ratings, etc) and that every landlord and tenant has different sustainable and net zero goals, there is no such thing as an off-the-shelf green lease.
As with all leases, a green lease can be negotiated at various stages of occupancy before securing an agreement between a landlord and a tenant. For example:
BEFORE THE LEASE HAS BEEN AGREED the landlord and tenant can mutually agree to environmentally sensitive clauses which could be enforced under the lease. These can be specific and allow for simple enforceability, or broader in scope and designed to commit both parties to principles, rather than setting specific rules and evaluation criteria.
DURING THE TERM OF THE LEASE a landlord and tenant can agree to improve the sustainability of the lease. Many leases require a tenant to comply with the requirements coming from the landlord. As these are often incorporated into the lease by reference, they are legally binding and, if a landlord choses to do so, they might amend the regulations without the tenant’s consent and without the need to renegotiate the terms.
Alternatively, the landlord and tenant could agree to a MEMORANDUM OF UNDERSTANDING (MoU). This involves both parties giving a non-binding commitment to work together to improve the environmental impact of a property. It could range from sharing information on energy consumption, to committing both parties to consider environmental best practice, energy and water efficiency, and adopting waste reduction measures.
One proviso of an MoU is that both parties work together in good faith. It can however be terminated at any time.
EPC rating
At its simplest, green lease commitments ensure that both parties will co-operate to improve the sustainability of a building.
A good starting point is the property’s Energy Performance Certificate (EPC). The Government has that announced that by 2030, the minimum EPC standard for any commercially occupied building will be “B”. However, a lower standard of “C” has to be achieved by 2027. The current grading is A-G; commercial properties with a rating of F and G cannot be leased.
The magnitude of this challenge was recently highlighted by Colliers, a firm of property consultants, who concluded that in London alone, about 20 million square feet of commercial space falls below the minimum EPC standard of “E”, whilst only 20% of properties are currently classed as “A” or “B”.
Given the fact that 80% of buildings standing today will still be in use in 50 years’ time, it is no wonder that this major issue has surreptitiously stalked all management teams in the private, public and charity sector.
Landlords’ obligations
It is the responsibility of the landlord to improve the EPC rating of a building.
In multi-tenanted buildings, it is likely that landlords will be responsible for providing a number of building-wide “green” services.
At the top of the list would be the safe management of waste to protect both the environment and human health. This includes waste segmentation protocols for recycling, reuse and/or recovery, as well as the disposal of waste which does not fall into any of these categories. In addition, the landlord is normally required to ensure that waste and refuse collections from the property are co-ordinated to reduce congestion and fuel emissions and duplicate journeys.
Another landlord responsibility would be ensuring that environmental performance infrastructure systems and protocols are in place. This is designed to encourage tenants to consider improving their energy consumption, green energy selection, water consumption, waste management, generation and/or emission of greenhouse gases.
Then there would be ensuring the property features metering equipment to measure the environmental performance of the building. The intel can be shared with the tenant(s) - via the service charge billing documentation, for example.
Also, there would be inclusion of any tax levies/environmental charges and outgoings relating to energy consumption.
Tenants’ obligations
One of the obligations on tenants will probably be to collaborate on environmental initiatives (see above) as well as adhere to sustainable use obligations, which optimise the property’s environmental performance.
In addition, green leases usually require tenants to comply with the environmental policies of the building they occupy, or attend sustainability forums set up to review the environmental and sustainability policies for the estate and to agree future “green” targets.
During the period of the lease a tenant may have to agree to new terms designed to improve the sustainability of the lease. Most leases require a tenant to comply with the rules introduced by the landlord. As these are often incorporated in the lease, they are legally binding. If a landlord choses to, they could amend the rules without the tenant’s consent or without scope to negotiate the terms.
Before even negotiating a green lease, tenants must understand the historic and anticipated energy consumption of the property.
Energy baseline
Reviewing the last 12 months utility bills, or even copies of recent bills, will establish an energy baseline. If it is a new build, tenants should ascertain what the anticipated utility costs will be. Given this data, tenants can work with their landlords and agree energy usage reduction goals. Some consultants recommend setting reduction milestones of at least 10% and agree a roadmap of sustainable practices with the landlord.
Collaboration with other tenants is a potent success determinant. Occupiers in a multi-tenanted building should ensure that they communicate regularly and work together on issues such as:
- Shared energy reduction goals.
- A commonality of green lease terms, across the building - and working together, persuade the landlord to improve terms (if necessary).
- Ensuring the landlord complies with their agreed obligations.
Dark or light green
As the adoption of green leases grows, some organisations have opted for either “soft” commitments (“light green”) or “hard” commitments (“dark green”).
Light green clauses may not be legally binding, or they might be limited in scope, or may include the setting of obligations, but without any targets or legal status.
Dark green clauses are usually legally binding, substantial in their level of commitment and broad in their scope. They might include obligations and targets formalised through Heads of Terms (between the landlord and the tenant) which become legally binding - with a breach potentially resulting in financial penalties, or recourse to a dispute resolution process.
The compelling reason
In addition to being good for the planet, as well as for future generations and, underpinning longer term energy reduction measures (especially germane given the current energy price volatility), green leases can also improve a charity’s finances, reduce utility costs, underpin fundraising strategies (especially if targeting PLCs or environmentally sensitive consumers). They have also proved to generate positive employee (attraction and retention) benefits.
However, like any lease, green leases are a legally binding contract. So do try to ensure that the legal team and the property advisers you select are able to negotiate the best (green lease) terms and agree an equitable green lease (whilst limiting your “green liabilities”).
