Green leases – how viable are they?

Could they be about to become a serious mainstream option?

Green leases – how viable are they?

When asked about priorities for the coming years, Meggie Sheldon (pictured), solicitor of commercial property at Parker Bullen Solicitors, said that many business owners believe that enhancing their environmental, social, and economic sustainability policies is a key area of focus. 

“While there are various ways a business can reduce its carbon footprint in the fight against climate change, having a green commercial property lease is growing in popularity,” Sheldon said.

She explained that, traditionally, commercial leases are tailored to the type of property and the needs associated with it. A green lease will contain contractual obligations to include factors such as environmental responsibilities and duties for both parties, with the purpose of making their premises more sustainable and environmentally friendly. For example, she pointed towards reviewing energy efficiencies and seeking improvements such as insulation, window glazing, smart metering and efficient lighting operations.

On top of this, Sheldon said the use of sustainable materials for any repairs, alterations or maintenance was important, as was reviewing transport links to and from the premises. Reducing waste, implementing or improving recycling facilities, and appropriate water management are other crucial ideas.

Read more: Green homes – what role will they play in UK's net zero climate strategy?

Can green obligations be introduced into a tenancy agreement?

Sheldon explained that while it is usually the landlord who will introduce green initiatives into a lease, in order to implement such obligations, both parties must be in agreement. 

“During negotiations of the lease, both the landlord and the tenant must agree as to whether the initiatives are legally binding and approve the scope of the terms,” she said.

According to Sheldon, these can either be specific requirements with sanctions imposed if they are not met, or general guidelines without legal obligations. 

“This scale is referred to as ‘dark green’, ‘medium green’ or ‘light green’, denoting whether requirements are legally binding or mere guiding principles,” Sheldon explained.

She believes it is important for tenants to appreciate that any of these initiatives could have an impact on service charge provisions, consent for alterations and reinstatement provisions at the end of the lease term.

Looking to the benefits of a green lease for a commercial property, Sheldon pointed to the advantage for the community and the environment - and added that landlords could also make their property more attractive to tenants.

“In my experience key issues for tenants include reduced non rental costs, of which the most important is the energy efficiency of premises,” she said.

Not only is this an environmental concern, but Sheldon explained that, given the current fuel crisis, it is likely to be of broader concern to all tenants.

Read more: Green action will speak louder than words

Green leases – what happens next?

Turning to preparation for government plans and legislation, Sheldon said there are two changes likely to be introduced in the coming years.

“First, the government has committed to reaching net-zero carbon by 2050, and second, by 2030, the government is proposing to impose a minimum energy performance certificate (EPC) rating of ‘B’, with an interim minimum rating of ‘C’ by 2027,” she said.

According to Sheldon, in order to achieve this, there will need to be a 30% reduction in building energy use by 2030.

Over time, Sheldon said a greener building may increase its value, benefitting the landlord directly and also potentially catching the eye of keen, forward-thinking investors.

“Many tenants will also be increasingly looking to their sustainability credentials as part of their attractiveness to their customers or employees,” she added.

Looking ahead, Sheldon said she is expecting tenants who are seriously reviewing their environmental policies, to consider the benefits of green leases, especially as they become more widely known.

“A final legal point is that the obligations imposed by green leases should be carefully considered; awareness of the advantages and disadvantages will be important to understanding the right path for you and your business,” she concluded.