UK: Green Lease Toolkit

With the ever increasing focus on environmental concerns, the property industry is being pushed to become more energy efficient. As reduction targets cannot be met simply by improving the efficiency of new buildings, attention is now being given to existing buildings.

The Better Building Partnership (BBP) has issued a new version of its Green Lease Toolkit (first issued in 2009) and a new Memorandum of Understanding (MoU) to encourage greater dialogue on environmental issues between owners and occupiers of both new and existing buildings.

A green lease is a standard form lease with additional clauses to provide for the management and improvement of the environmental performance of a building. It can also address wider sustainability issues such as water management, waste management and use of sustainable materials for buildings. The provisions in the lease are legally binding on the parties and remain in place for the duration of the lease term. The extent to which green clauses will be adopted depends on how 'green' the parties wish to be and the circumstances of the transaction (such as the age and nature of the building).

Alternatively if the parties do not agree that green clauses should be added to a lease they can enter into a MoU. This is a separate and voluntary agreement between owners and occupiers which is not legally binding and can remain in place for any chosen length of time. A MoU runs alongside a lease and addresses the same matters as the green lease clauses, but it cannot be enforced if either party is in breach of their obligations. Although most relevant to commercial properties, green lease clauses or a MoU can also apply to residential property owners and occupiers.

Both the 'green' lease clauses and MoU address the following:

• Promotion and discussion of strategies to improve the environmental performance of the building.
• Sharing of data on environmental performance and metering for different parts of a building.
• Limitations on the parties' ability to carry out works to a building which adversely affect the environmental performance of the building.

Reinstatement of tenant alterations which adversely affect environmental performance. This clause, if adopted, would relax the need to reinstate where reinstatement would adversely affect the environmental performance (unless the landlord reasonably required otherwise).

Wider scope for the parties to carry out works which enhance environmental performance.

A MoU can also be suitable for existing leases where both parties want to deal with environmental performance of the building and have already signed a lease.

Whilst it is not currently obligatory to include green lease clauses in a lease or enter into a MoU, energy efficiency and sustainability issues are being given increased attention. The property industry is going to have to seriously consider 'green' issues when agreeing heads of terms, failing which the government may push for legislation.

A copy of the green lease toolkit and MoU can be found at www.betterbuildingspartnership.co.uk/download/bbp-gltk-2013.pdf.

The model clauses in the green lease toolkit provide an extremely useful starting point for drafting and negotiation. However, they must be used with care, and with an eye to the landlord's legitimate interest in enhancing the return from its investment.

Green lease clauses – hidden risks for landlords?

The green lease toolkit was reissued in August 2013 by the Better Buildings Partnership, a group including some of the UK's leading landlord bodies. It includes a range of model clauses designed to promote cooperation and to facilitate improvements in the energy performance of commercial buildings.

There is a compelling reason to focus on energy performance. If Section 49 of the Energy Act 2011 is implemented as required by April 2018, commercial premises with an energy rating of F or G "may not be let". That prohibition on letting is intended to apply pressure on parties to take steps now to improve energy efficiency. The green lease toolkit includes clauses to govern works carried out by the landlord or tenant to improve efficiency, and to restrict works that may have an adverse effect on energy performance.

Of particular concern is the clause that reads:

For the purposes of the toolkit, "Environmental Performance" is defined in very wide terms. It includes energy consumption, water consumption and discharge, waste generation and management, generation and/or emission of greenhouse gases and other adverse environmental impacts. One consequence is that an increase in energy consumption for whatever reason would count as an "adverse effect".

Consent not to be unreasonably withheld

The model clause provides optional wording requiring tenant's consent not to be unreasonably withheld or delayed. That would certainly help, but it is essential to remember that the statutory regime governing landlords' consent differs significantly from general consent requirements, and that tenants are not bound by the regime that governs landlords.

Where landlords' consent is required for tenant's "improvements" it may not be unreasonably withheld, and in reaching its decision the landlord is bound by case law to have regard only to matters directly relating to the landlord-tenant relationship and its interest in the premises. The landlords' scope for refusing consent is limited by a combination of Landlord and Tenant Act 1927 and judgments interpreting that statutory regime.

Given that tenants are not bound by that statutory regime, a requirement for tenant's consent must be analysed on general commercial principles, meaning that the tenant may acquire a significant – and perhaps excessive – degree of control over the landlords' Building.

The concern stems from, and is exemplified by, Barclays Bank v Unicredit [2012] EWHC 3655. In that case Barclays' consent was required for termination of a commercial arrangement. Barclays refused to consent, and that decision was upheld by the court. Outside the statutory regime applicable to landlords, a party whose consent is required may make its decision by reference only to its own commercial interests. It is not required to carry out a balancing exercise, weighing its interests against those of the other party.

The model clause requires tenant consent before a landlord can carry out works to parts of the Building that are outside the tenant's demise. One example might be a landlord's decision to reconfigure the Building to allow for greater intensity of occupation, whether by adding space such as an extra floor or extension, or by subdividing existing units. In any such case it is highly likely that intensified occupation would result in increased energy consumption or greenhouse gas emissions. From the landlord's perspective, increased returns from its investment in the Building might more than justify those "adverse effects". However, a tenant armed with the model clause – whether or not with the optional wording stating that its consent is not to be unreasonably withheld or delayed – might conclude that it should block the landlord's proposal. With Barclays v Unicredit in mind, the tenant might reasonably decide that it can safely refuse consent by reference only to its own commercial interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.