Richard James, Hill Dickinson

The carbon footprint of buildings is the source of 50% of greenhouse gas emissions in the UK. It is imperative that the energy efficiency of buildings is improved if the Government target of an 80% reduction in greenhouse gas levels by 2050 is to be achieved.

Increasing legislation from both Westminster and Brussels has placed environmental issues and sustainability at the very heart of the political agenda. Sustainability considerations have been strengthened in the Planning and Building Regulations systems and tax incentives offered for increased energy efficiency.

Whilst section 172 of the Companies Act 2006 imposes a new legal duty on company directors to have regard "to the impact of the company's operations on the community and the environment", many companies have already identified the tangible benefits of improved corporate image arising out of a CSR (corporate social responsibility) policy which embraces sustainability issues.

So, against this background, what are green leases, where do they fit in, and what are the advantages and disadvantages to landlords and tenants of embracing them?

What is a Green Lease?

A green lease is a standard lease that includes additional clauses requiring landlords and tenants to work together to develop and improve the sustainability of buildings, maximise energy savings and drive down greenhouse gas emissions, thereby creating an energy efficient, cost effective and sustainable space.

Green leases were first introduced in Australia in September 2006 in the form of the Green Lease Schedules (GLS) developed for Australian government agencies and which have since expanded to incorporate the private sector as a voluntary initiative.

In the UK, faced with the Government's climate change agenda, the property industry itself is pushing the need for green leases.

What should a green lease include?

In January 2007 the Centre for Research in the Built Environment (CRiBE) published a good practice guide for incorporating environmental best practice into commercial leases.

In April 2009 the Better Buildings Partnership (BBP), which is a group of leading property owners brought together by the London Development Agency, published the Green Lease Toolkit which provides a set of guidelines for green leases based upon the Australian government model. The guidelines provide:

Best Practice Recommendations - enabling owners and occupiers to agree the best arrangements that fit their particular circumstances, based on a partnership approach.

Memorandum of Understanding (MoU) - an alternative approach which the parties can enter into at any time during the life of the lease and which runs alongside the lease, the MoU is not legally binding but requires the co-operation of the parties to ensure the building is run in as sustainable and energy efficient a manner as possible.

Model Form Green Lease Clauses - which the BBP recommends are included in new and renewal leases.

The BBP toolkit recommends that as a minimum the following clauses should be included in a green lease:

Co-operation- to encourage the landlord and tenant to co-operate in relation to energy and water consumption and waste generation.

Data sharing - the landlord and the tenant should, on a confidential basis, share data on energy and water use, waste production and recycling and also maintenance records.

Restrictions on tenants alterations and landlords works - restrictions should be imposed on alterations which may affect the efficient use of water or energy and both parties should consider any suggestions to avoid or minimise any adverse effect of the alterations on any existing EPC rating or the efficiency of the building.

Flexibility - to allow the landlord access to perform energy saving works (and/or to prepare an EPC or inspect air-conditioning systems) and to allow the tenant to carry out energy saving alterations (which should then be disregarded on any subsequent rent review).

Metering - the landlord and/or the tenant may be given the right to install separate sub-metering of utilities in the common parts and demised premises.

Reinstatement /dilapidations - blanket requirements for removal of tenants' alterations may cause unnecessary waste. Tenants should not be required to reinstate alterations or face dilapidation costs where measures have been taken which improve energy or water efficiency unless the landlord reasonably requires reinstatement to enable re-letting or use of the premises.

Building Management Committee - it is essential that the parties communicate and thus it is important that a Building Management Committee exists and meets regularly to discuss environmental issues and agree an Energy Management Plan.

In addition to these "must have" clauses, the BBP toolkit recommends other clauses, including:

- imposing energy efficiency targets on landlord and tenant (possibly backed up with rent adjustments to reward good performance and/or penalise bad performance);

- service charge adjustments to reflect the use of energy and water by individual tenants;

- provision of a tenant handbook providing all energy and environmental management information;

- waste strategy, including waste audits;

- water saving measures;

- dispute resolution.

Different shades of green

Clauses appropriate for new buildings may not be appropriate for an old building and each case will need to be considered on its own set of circumstances. Consequently, a distinction is emerging between what are being called light green and dark green leases:

- a light green lease will be based on co-operation and will not contain commitments but rather encourage a more sustainable operation of the building;

- a mid green lease may contain some commitments, although failure to action these will not constitute a breach;

- a dark green lease would contain obligations to reach specific targets and may impose penalties, rewards or even forfeiture provisions.

What are the advantages and disadvantages of green leases?

Advantages:

1. Whilst the cost of constructing or renovating a green building is initially more expensive, over a period of time the operating costs should be reduced and increased energy efficiency should safeguard property values.

2. An energy efficient building with lower operating costs should be more attractive to tenants, who are increasingly being forced to consider their own green credentials.

3. Green lease principles will have positive benefits for the owners and occupiers of buildings and a wider impact on the global environment.

4. Improved reputation, demonstrating compliance with CSR policies and the new Companies Act duties.

5. Getting ahead of the game by addressing relevant legislation relating to Building Regulations, EPCs and the CRC.

Disadvantages:

1. The risks of adopting green lease principles are not yet clear.

2. The cost of making improvements is a big barrier to change. Tenants may be deterred from entering into a lease if the landlord passes on these costs in the guise of rent and service charge.

3. Producing and complying with energy efficient policies will require time and resources which could well be spent in other areas of the business.

4. Uncertainty and lack of knowledge of sustainable practices.

5. Although the long leaseholder will benefit, the same may not apply to the short leaseholder who may not be around to benefit from the long term positive impact of environmental polices. Less stringent obligations may need to be placed on the tenant of short leases.

The way forward

Clearly there is nothing to stop landlords and tenants from moving forward on green issues on a voluntary basis. However, if waiting for the start of a new lease or lease renewal does not drive the changes quickly enough, the MoU will provide a faster route.

Landlords should be thinking about whether to include green lease clauses in their standard leases and tenants need to consider how ambitious their desire is to improve the energy efficiency of their buildings and adopt some of the recommendations discussed.

The momentum supporting the case for green leases is being led by certain institutions and property companies. Hermes (a founder member of BBP), Exemplar Properties and Philips Research are the first companies to publicise the implementation of green leases. Others will undoubtedly follow this lead.

It is envisaged that, as the green lease momentum continues, green leases will become accepted by both parties and we can look forward to a greener future.