Whilst it is not yet a legal requirement for green leases to be adopted, whether, in the private or the public sector, with environmental responsibility forming an increasingly crucial part of international, governmental, and corporate strategy, it is becoming more important than ever to reflect on this at each stage of a company’s lifecycle.

What is a green lease?

There is no catch-all definition for a “green lease”. Instead, it is an umbrella term used for several different types of documents, which reflect the commitments of a landlord and tenant in relation to their environmental obligations.

There are two main categories:

• ‘Green leasing’: is a combination of alternative methods designed to manage the relationship between the landlord and tenant by referring to different environmental processes and practices to be implemented in relation to the building and the premises; and

• ‘Green leases’: are built around ‘green’ clauses within the lease itself which aim to account for energy efficiency and other sustainability objectives.

Green leasing

The Better Buildings Partnership has produced a toolkit, which provides alternative, non-legally binding practices which can be adopted by landlords and tenants, including:

• entering into a memorandum of understanding. This offers both the landlord and tenant an opportunity to agree on goals and targets to be met in relation to the environmental performance of the building;

• agreeing an environmental management plan or strategy; and

• establishing a building management committee, which creates an open forum to oversee the environmental performance and efficient operation of the building.

These options are not legally binding, but instead, provide a flexible and less onerous written commitment between landlord and tenant. In essence, they create communication channels for both parties to agree on joint action points.

Green leases

A green lease will take the form of a standard commercial lease, but with added provisions that set out the management of the environmental and sustainable qualities of a building. The level of amendments can range from softer “light” green clauses to more onerous “dark” green clauses. These obligations may be contained within the provisions of the lease or within a schedule.

Light green clauses may not be legally binding. An alternative “light” option is to check the existing lease to remove existing obstacles. For example, ensuring that the drafting of standard lease provisions allows for the parties to fulfill their obligations whilst considering the impact on the environment (e.g. amending alterations clauses in order that landlord consent is subject to the carrying out of works in a sustainable and environmentally friendly manner.)

Mid-green clauses may create more onerous obligations. From the outset of negotiations, the landlord and tenant may agree to create a structure that promotes a relationship of cooperation, communication about energy usage, and potentially the agreement of an energy management plan or memorandum of understanding. Failure to meet the targets would not lead to legal enforcement.

Dark green clauses are usually legally binding. The lease may seek to set out rigid energy efficiency targets and more onerous obligations on both parties. Nevertheless, the force of these provisions can be moderated by the corresponding remedial response (e.g. financial penalties or dispute resolution mechanisms).

Examples of amendments include:

• rent payable and rent review linked to energy performance targets, and obligations to share information relating to utilities or energy performance;

• alteration covenants and fit out work provisions containing a prohibition on the carrying out works which may be detrimental to the environment or energy performance of the premises or the building;

• maintenance covenants which promote or ensure the use of environmentally friendly contractors/methods;
  
• covenants which exclude uses which have a detrimental effect on energy performance; and
  
• a yielding up covenant requiring at least the same (or possibly higher) level of energy efficiency as at the commencement of the lease term.

Important considerations

There are many benefits to entering into green leases and such actions often further existing duties, commitments and policies. Examples include:

• existing environmental, social and governance policies (ESGs) regarding the alignment of a business’ values with employee values, the improvement of public relations and the creation of business responsibility objectives;

• certain companies have a duty of disclosure to report on climate-related and environmental matters; and
  
• public sector organisations, including central government, are subject to Green House Gas targets and reporting obligations under the Greening Government Commitments and Emissions Reduction Pledge 2020.

However, businesses should consider the following practical points and cost considerations:

• the nature of the transaction (e.g. are the premises located within a new or old building? Is the building for sole occupancy or multi-let? How long is the term?;

• the stage of the transaction (prior to commencement or mid-term);

• the cost implications associated with the installation, maintenance and monitoring of any agreed energy efficient equipment and the liability attached to the green lease obligations.

How can we help

At Lewis Silkin, we have an experienced team available to provide comprehensive support for landlords and occupiers who are considering future-proofing existing leases, entering into new green leases, or simply finding non-binding alternatives to further their environmental objectives.

Want to join The Collective, and contribute to the debate?

Email us at: The.Collective@lewissilkin.com