Landlords, investors and lenders – do your bit for the planet, be ‘green’

Buildings and their occupiers are significant contributors to the UK’s energy and water consumption and waste generation, from construction or refurbishment to fit out, alterations and actual occupation.  The UK built environment accounts for 25% of the country’s greenhouse gas emissions so substantial carbon reductions could be made if every owner, lender or occupier considered their property portfolio as part of their ESG strategy.  So, what can you do in practice to work towards combatting the climate crisis and achieving net zero targets?

Landlords and investors can seek to impose ‘green’ obligations on tenants and lenders may require green leases as part of the conditions of lending.  Whilst it is increasingly common for landlords to issue leases containing green provisions, tenants may resist these on the basis that such provisions are overkill and create unreasonable and unaffordable obligations on a tenant.  As an alternative to including these provisions in a lease, landlords may consider preparing a ‘sustainability plan’ or ‘memorandum of understanding’ (MoU) which is separate from the lease and could form part of centre regulations or a retail guide that tenants must comply with.

A sustainability plan can be amended from time to time to offer flexibility as Government or sustainability requirements evolve.

Alternatively, under an MoU, the landlord and tenant enter into an agreement, setting out how they will work together to improve and manage the building’s environmental performance.  As a result, both landlord and tenant will have a clear understanding of their respective obligations and common purpose.

‘Green’ provisions in a lease, sustainability plan or MoU may include:

• EPC rating – an obligation on the tenant to maintain the existing EPC rating or to ensure that the tenant does not reduce the EPC rating by carrying out approved alterations. Tenants are not obliged to improve an EPC rating whilst in occupation, but this could change in future especially where there is an incentive for the tenant. This is particularly important as with effect from 1 April 2023, a landlord may not let or continue to let a building that has less than an E rating so cannot allow a tenant to reduce the property’s rating;
• Data sharing – data sets the benchmarks and targets for the building and is key to the reporting obligations on one or both parties. Provision for data sharing and metering can ultimately contribute to improving the property’s environmental performance;
• Alterations – a provision allowing the landlord to assess the overall environmental impact of the tenant’s proposed alterations or obliging the tenant to use sustainable or recycled products for the fit-out, before consenting to the alterations;
• Collaboration agreements – agreements between landlord and tenant to engage with one another to operate the building more sustainably (collaboration agreements are separate from the lease);
• Cost sharing – tenants may be reluctant to improve the environmental performance of a property as part of their fit out due to the relatively high costs of green technologies. Landlords may consider sharing these costs in a balanced way as a departure from the traditional landlord/tenant relationship to encourage tenants to take up environmentally friendly options which may be left in place following the expiry of the lease; and
• Control over energy providers or renewable energy sources – provisions allowing the landlord to stipulate utilities providers or sources to ensure greener options are chosen.

Green leases, MoUs and sustainability plans may appear on the surface to have marginal impact on our fight against the climate crisis, but if everyone in the commercial property sector takes responsibility by doing what they can, we will collectively be able to make a positive impact in saving and protecting the planet.