UK: The "Green" Lease

How Concerns About Sustainability Are Being Reflected In Contractual Arrangement
Last Updated: 10 July 2008
Article by Linda Fletcher

What is this?

In our last Alert we looked at how legislation is changing the way buildings are constructed, particularly in relation to the standards that are expected and the information that is to be provided about energy efficiency, for example the EPC requirement. Whether you are a developer, owner or occupier of real estate you need to be aware of these changes. In Part Two of this series we examine how concerns about sustainability are being reflected in the contractual arrangements between owners and occupiers and what you should be asking for or be prepared to offer in this respect. You have probably already started to hear reference to the "green" lease, being really an extension of the use of what is now familiar jargon such as "green" energy, "green" buildings, "green" products etc.

Essentially it is a reflection of the commitment of both the owner and the occupiers of commercial buildings to create an efficient, cost effective and sustainable workplace. It is not simply the inclusion of provisions in a lease whereby the parties accept additional responsibilities for the operation and use of a building.

Global experience

In Australia the green lease has been around since September 2006 with templates for green lease schedules having been produced for use in lease transactions involving government agencies or bodies1 The green lease schedule is stated to be part of the Australian Government's policy to reduce the environmental effect of its operations, and by so doing, to lead the community by example. The schedules contain mutual obligations for tenants and owners of office buildings to achieve efficiency targets and set a minimum ongoing operational building energy standard and address the issue that buildings can operate well below their design energy efficiency standard without regular assessment and review. Standard clauses are provided concerning energy performance rating, separate metering, a building management committee who meet regularly to share information, data and possible new measures, an energy management plan and a disputes and remedies clause. Eight green lease schedules have been designed for use in a variety of different lease arrangements.

The CBI Task Force on Climate Change noted that this is an issue on which government, business and the consumer all have a role to play. Government agencies should certainly be taking a leading role in reducing emissions from its buildings. However, the figures for the UK Government's management of its own buildings do not support this. The Commons Public Account Committee report in December 2007 that only 9% of refurbishment projects met required environmental standards.

Additionally only 35% of new builds and 18% of major refurbishment projects were environmentally assessed, even though this is meant to be mandatory under the changes to the building regulations which we discussed in our last Alert. A number of other countries are also adopting green leases – for example Canada is working on developing a green lease precedent model as is Sweden and other Nordic countries. The UK has traditionally used voluntary codes to change lease practices, but with little success and has, for example, threatened many times to make the Code for Business Leasing Premises mandatory.

Relevant Lease Provisions

As already stated a 'green lease' does not mean simply changing the words in a few lease provisions. What is really required is a change in the culture and behaviour of all the parties involved in relation to the operation and use of a building so that there is a real 'buy-in' to maximizing the efficiency and minimizing the impact of that building on the environment. This is not the usual cost-benefit analysis. That said for this new relationship to work there will need to be changes to the fundamental wording of a lease.

You will start to see (and we already have) new provisions in leases whereby the landlord is required to manage the property not only in accordance with the principles of good estate management but also sustainable management. The detail in service charge schedules and definitions of building operating costs will all need to be discussed and considered carefully by both owner and occupier to make sure both parties are satisfied that the costs that can be recovered to reflect the agreed objectives and ultimately will assist in lowering the operating costs of the building. Similarly if you are a landlord you should be requiring the tenant to also behave responsibly. You can therefore expect to see environmental commitments being imposed on tenants as well. It is, after all, ultimately the building's users and their policies on energy consumption, water usage and waste which will have an effect on the environment. There is little point in designing an energy-efficient and sustainable building unless that technology is then used in the way it was intended.

As a tenant you should ask to see, or expect to be given, in the marketing pack, details of the building management system which will need to include, amongst other things, the energy systems (lighting, heating and cooling) used in the building, the facilities provided for waste collection and, in particular, separate collections to encourage segregation of waste and water conservation systems, for example, simple things such as spray taps. Such a manual, in the same way as the health and safety manual for a building, will need to reviewed and updated during the life of the building.

In multi-tenanted buildings will you, as a landlord, need to install separate meters for each tenant, so the service charge can reflect actual use by a tenant rather than by floor area occupied compared to the whole, so as to incentivise tenants to also take steps to minimise their energy requirements and water use? If this is going to be the norm then developers should be factoring this into the design plans now for their new office and other commercial buildings. Or will there be a unified building management system, so that all tenants need to be encouraged to reduce their energy use so as to reduce consumption for the building as a whole?

An energy management plan should also be developed which will provide information to assist tenants in deciding what simple steps they can take to reduce their energy usage and perhaps including obligations on each tenant to take such steps. It can also provide information on the sourcing of office equipment and materials for fit-outs.

As a tenant you can also expect to see changes relating to your rights as an occupier to carry out alterations. Are you as a tenant planning a major fit-out and will it be reasonable for your landlord to refuse its consent if your proposals do not include the use of recycled materials or the installation of energy-efficient appliances where economically feasible? You would be advised to reflect these concerns by including express wording at the start of a lease rather than leaving it to interpretation at the time of what is meant by or included within the words "acting reasonably". Can this be extended over time so that the landlord can impose requirements as to the sourcing of office equipment and materials used for fit outs?

As the owner of the building you will also want to ensure that any alterations do not adversely affect the energy performance of the building. As the occupier you should consider carving out of the reinstatement provisions that will bite at the end of the lease any works that have been carried out to improve the energy-efficiency of the premises and/or the building.

Should you, as the occupier, be requiring the landlord to achieve/maintain a specific energy rating throughout the term and even including obligations that the landlord has to carry out the EPC recommendations? If so how are such costs to be recovered and to be shared amongst the other tenants in the building? As an occupier are you prepared to accept that these costs form part of the service charge on the basis that you will, in the long term, benefit from reducing energy costs resulting from those works? You could also require that any repairs which the landlord is required to carry out under the repairing covenant are carried out so as to improve energy efficiency, be it modifying the plant or ensuring such plant operates at maximum efficiency.

Rights of access for energy assessors to enable the issuing of EPCs will also begin to appear in leases although, as we saw in our last Alert, the 2007 Regulations do impose a duty on those in occupation of a building to allow access. Consider though if you as an occupier are assigning your lease and your space is designed so it can be used separately from the whole of the building and has separate services, then the duty to provide the EPC on that assignment falls on you. As a result you will need access to information about the building so you can indeed comply with your obligation to provide an EPC.

Are you as the landlord able to recover the costs of providing any EPCs for the building via the service charge and when is it reasonable to do so? If you are selling your interest in the building then there is a strong argument that you should bear this cost. Alternatively parties could agree to share the costs. As an occupier you will also be concerned to make sure that if the need for an EPC has been triggered by another occupier in the building, you do not have to pay a proportion of the cost of providing that EPC. For residential dwellings the costs of providing an EPC have been in the region of £300 to £500 so forcommercial buildings you can expect this to be much greater and we have even seen suggestions of £10,000 being a possible cost for large commercial buildings. So you can expect to see specific and express wording in leases to allow, or, in some cases, not allow, this cost to be recovered.

When looking at the terms of the hypothetical lease as part of the rent review clause in a lease you can now expect there to be a discussion about whether this should include a new assumption that the building has an 'A'/'A+' energy asset rating in order, from a Landlord's perspective at least, to argue for a higher rent on review. As to the rentalisation of "green" improvements the treatment may vary depending on who carried out the works.

Benchmarking and other tools

There are a number of tools being developed to help owners, occupiers and managers assess, analyse and then look at steps to improve the energy efficiency of buildings. It is, of course, harder with existing buildings to achieve these aims but during any refurbishment projects by the owner or fit outs by individual occupiers this should then form an integral part of the design of such works.

The British Property Federation ("BPF") together with the Usable Buildings Trust, with funding from the Carbon Trust, have developed a tool known as the Landlord's Energy Statement ("LES") to assist landlords and managers of office buildings to understand and recognise the energy used in a building in providing communal services. It will also identify areas of improvement and provide comparisons against other similar buildings with similar uses. Companies such as Land Securities plc, Hammerson plc and Standard Life are now using this tool for some or all of their office buildings. The BPF are also aiming to launch in late spring/early summer of 2008 a tenant's energy review tool ("TER") to assist tenants in measuring, monitoring and benchmarking their energy use and resulting CO2 emissions, with the idea being that when taken with their share of the LES for the building they will be able to calculate their total carbon footprint. This is being developed by the BPF, the British Council for Offices, the Chartered Institution of Building Services

Engineers and the Usable Buildings Trust, again with funding from the Carbon Trust.

The Investment Property Databank, in association with CBRE, Barclays and Bureau Veritas, launched an international "Environment Code" in February this year for measuring the environmental performance of buildings to assist in the monitoring and comparison of performance of buildings in terms of energy, water consumption and waste produced so as to facilitate informed decisions about which buildings to occupy and then how to manage operations at such buildings. Its aim is to provide a single international benchmark to assess how buildings affect the environment and so assist owners and occupiers of corporate property; i.e. corporate occupiers can assess their global environmental impact.

The IPD Environment Code includes an interesting statement as follows:

"It is important to measure the total environmental impact of buildings and the Environment Code is directly relevant to building owners, managers and tenants who wish to collaborate to ensure that their

buildings perform in totality – not just the areas for which they are responsible" and this sums up very well the concept behind a "green" lease.

Other benefits

Green leases will to a certain extent offer the same benefits for both landlords and tenants. It will be important to branding and corporate image and there is evidence2 that green buildings lead to higher worker productivity and a pride in the building itself, there will be lower operating costs and, for owners, a higher demand for such a building can be expected to lead to higher valuations.

In addition and whether you are a developer, owner or occupier you need to be mindful of the duties on directors under the Companies Act 2006 which stipulates that although the directors are required to promote the success of the company in dong so the directors must "have regard to the impact of the Company's operations on the community and the environment".

We see this being reflected in companies CSR statement/report as part of its annual report and accounts and the benchmark tools we refer to earlier can be used to assist in the reporting of your environmental performance. Investors, customers and your own employees will increasingly be asking what your organisation is doing to reduce greenhouse gas emissions. Your real estate ownership and use should simply be part of a comprehensive approach to sustainability.

What next?

Managers of buildings will need to demonstrate an understanding of the legal regime and be able to offer skills in effectively managing energy, water and waste (minimisation and disposal) as an integrated service to assist in meeting both the property owner and occupiers' requirements for a sustainable and energy-efficient building. For it to be a true success the traditional relationship of landlord and tenant will need to change so itis a real two-way relationship as opposed to the parties having different obligations and indeed objectives.

With the continued legal and policy steps to combat climate change, particularly in Europe, and the UK Government's proposals regarding zero-carbon homes and the likely extension to commercial buildings as well as the proposed Carbon Reduction Commitment, you can expect "green" leases to become the norm with a change in and challenge to traditional management practices and obligations being accepted by both parties so as to attain sustainable and energy-efficient buildings. The co-operation of the landlord and the tenant is needed to make sure that not only is sustainable technology used in the design of the building but it is then used in an efficient manner. To meet the UK's ambitious carbon reduction target of 60% by 2050 a lot more has to be done and with buildings representing one of the largest contributors to emissions if business does not start to respond and to change behaviour you can expect legislation to be introduced requiring you to do so. In our next Alert, the final part of this series will look at simple steps that can be taken by businesses as part of any corporate social responsibility programme to reduce the effect on the environment of the buildings they occupy. In particular we will focus on the Carbon Reduction Commitment in the UK, being part of the proposed Climate Change Bill, and its likely effect on businesses which have a high annual electricity usage.

Footnotes

1 Prepared by the Australian Government solicitor for the Commonwealth of Australia.

2 Green Value Study 2006, Realpac

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.

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