Greening Commercial Leases
The Climate Change Act 2008 provides a legally binding target for the UK to achieve at least an 80% cut in greenhouse gas emissions by 2050, with an interim target to reduce emissions by at least 34% by 2020 against a 1990 baseline. Commercial and industrial buildings contribute over 18% of the UK’s carbon emissions and the majority of these buildings are occupied by tenants. The built environment and tenanted property therefore has a clear impact on the UK’s ability to meet its climate change commitments.
Green leases have long been recognised as a potentially powerful mechanism to reduce carbon emissions in commercial property. Broadly speaking, a green lease is one which contains a series of provisions that encourage or require the landlord and the tenant to reduce the environmental impact of commercial premises. The evolving combination of government incentives, policy and regulation (e.g. Energy Performance Certificates; the CRC Energy Efficiency Scheme; requirements for carbon free nondomestic new build by 2018; and the directors’ duty to have regard to the impact of operations on the community and the environment) will inevitably drive the commercial market towards the adoption of green leases.
Whilst green leases have been introduced by some large landowners such as British Land and Land Securities in England and Wales, few practitioners in Northern Ireland have encountered them (at present, there is no legal requirement that they be used). The key barrier to the development of green leases appears to be the question of who will pay for potentially costly energy efficiency improvements and retrofitting technologies - particularly in the current economic downturn. A landlord may not wish to invest in new energy efficiency measures where only the tenant benefits from a lower energy bill; equally, the current market is dictating shorter lease durations which mean that a tenant is unlikely to want to fund capital expenditure on environmental improvements with long payback periods.
Yet it is a misconception (and a missed opportunity) to view green leases simply as a means of forcing parties to spend money now on expensive energy efficiency technology that might not yield savings for years. They can, in fact, be a means of measuring and managing buildings more efficiently to save money in the immediate term. One approach could be to implement a gradual culture shift by introducing “light green” lease measures. These could be obligations limited to improving energy efficiency, or which have little cost impact, and concentrate initially on changing landlords’ and tenants’ behaviour. For example, landlords and tenants could be required to share data on energy use. Further steps could be the tenant covenanting that its fit out works/alterations will not affect the energy efficiency of the building, or parties agreeing that environmental improvements will be excluded from dilapidations liability and/or rent review calculations.
Whilst the market may not be ready to pay for improved environmental performance, there is expectation amongst investors that poor energy performance will lead to price chipping in the future and impact capital value. There is a clear opportunity for market leadership in this field in Northern Ireland, and small but not necessarily onerous changes could yield significant results.
If you require further information on any aspect of this article, please contact:
Anna-Marie McAlinden, firstname.lastname@example.org, Telephone 028 9055 3309.