A Green Lease is a lease that includes additional obligations on both the landlord and the tenant to monitor waste and improve energy performance. The government plans to make all new commercial buildings carbon neutral by 2020. With this in mind, the introduction of a green lease would seem like a logical next step closer to achieving this. Unlike the updated lease code that was introduced last year, the green lease looks to correct the balance not between the landlord and tenant but between the property and the environment. However, it is not all gloom for no gain as tenants are likely to save money on energy bills and may benefit from service charge and even rent concessions if they honour their obligations in the green lease.

The good practice guide for incorporating environmental best practice into commercial leases (produced by the Centre for Research in the Built Environment) outlines model green lease clauses some of which may be of particular relevance to retailers:

  • Alteration - covenants in leases to include an absolute prohibition on carrying out any alterations which have a material adverse impact on the environmental performance of the building.
  • Dilapidations - come the end of the term of the lease, the landlord may be inclined to waive the dilapidation costs where “green” measures have been carried out by the tenants during the course of the term. On the flip side of this, the landlord may also want to consider including works in the schedule of dilapidations that include bringing the property up to the same EPC grade as at the start of the term if this slips during the course of the term.
  • Sharing of data - channels of dialogue between the landlord and tenant should be open with obligations on the tenant to provide full details to the landlord of the tenant’s energy and water use including the provision of meter readings and allowing the landlord access to inspect the energy efficiency of all apparatus and machinery and plant and equipment. This data can be used to improve energy efficiency.
  • Reinstatement – the lease should reflect the fact that the tenant will not be required to reinstate or remove alterations that have been made to achieve energy efficient measures/targets.
  • Separate Metering - provisions can be included in the lease to provide that the landlord will ensure that the different premises are separately metered for electricity, gas and water services.
  • Financial Incentives - there could be financial incentives for a tenant who hits their ‘green targets’. Landlords could face penalties if they fail to fulfil agreed obligations in terms of energy efficient improvements or meeting required energy efficient ratings for the building.
  • Service Charge - the landlord can reserve discretion to adjust the environmental aspects of a service charge that is proportionally payable by individual tenants in accordance with their resource efficiency.
  • Assignment or Underletting - there will be requirements on any assignee or sub-tenant to covenant with the landlord to comply with any of the landlord’s environmental policies for a building.

Green leases could go even further than this and include terms that relate to waste disposal, transport, catering and other services that may have a green aspect or element to them. On a practical level, we advise that the green lease clauses are considered now to prepare for what seems to be imminent legislation or regulation.