It is clear that reducing the environmental impact of property is key to the Government's drive to cut the UK's carbon emissions. Energy performance certificates will be introduced across the commercial property sector to promote behaviour change. A recent UK Green Building Council report commissioned by DCLG has opened the debate as to when new commercial buildings can follow the residential industry's example and set a timeframe for zero carbon new buildings. Can leases be used as another way of encouraging or even enforcing behaviour change - or in other words, can they be green?
The lease is the mainstay of commercial property investment, and its terms have a significant impact on the valuation of a property. Landlords and tenants look to the terms of the lease to determine what can and cannot be done in relation to a property, and importantly, who pays for what. Both landlords and tenants could seek to use the lease to ensure that their green credentials are taken into account - either party could be the driver, depending on its policies and commitments. Some standard lease terms could be adapted to promote, or enforce, environmentally friendly behaviour. Alterations could be required to be carried out using sustainable materials, or the landlord could be required to upgrade the building's heating and lighting systems to more energy efficient systems when in need of repair. However, the interplay between these changes and the impact on rent review, service charge recoverability and the tenant's ability to assign the lease must be taken into account. Also, the danger in being too specific is that there is no guarantee that today's technology will still be applicable throughout the term of the lease which could be anything from a few months to 999 years.
What other initiatives can be considered by both landlords and tenants who wish to work together to improve the energy performance of a building? There are some obvious practical steps to take - commissioning an environmental consultant to advise on improvements is a good start, as well as ensuring that the managing agent for the property is up to speed with the latest developments. Any tenants' handbook for the property can also incorporate environmental best practice.
The dilemma is the same, irrespective of the type of property - is it certain that purchasers and tenants will pay more for a new zero carbon building, in order to justify the capital expenditure required by developers? Who will pay if an existing building is to be upgraded, particularly in the case of a multi-let building, and will it attract higher rents as a result? An equal commitment from landlord and tenant to energy performance improvements will drive change. The extent to which the terms of leases should change to promote or enforce these improvements is still unclear.
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