What is a Green Lease?

Green Leases are believed to have originated in Australia from an initiative taken by the Australian Government’s Department of the Environment and Water Resources. The Australian Government Solicitor prepared a template lease for use in lease transactions involving government agencies or bodies. The key elements of the template were as follows:

  • A commitment on the part of the tenant to achieve a rating under the Australian Building Greenhouse Rating Scheme.
  • A commitment on the part of the landlord to maintain the central services of the building to such standard to ensure the Australian Building Greenhouse Rating is retained.
  • An obligation on both parties to consider “in a reasonable and co-operative manner” whether an improved rating can be achieved during the term of the lease and, if they agree, to take whatever steps lie within their control to achieve that rating.
  • Both parties to commit to an energy management plan to operate the building in accordance with prevailing government policy on energy conservation.

The Australian Green Lease template contains clear legal commitments on the part of both landlord and tenant and these will have financial implications for both parties. Concerns have already been expressed that such obligations may have unintended consequences and may, for instance, have an adverse effect on rent reviews. This is not a major problem in Australia where parties typically sign shorter leases which contain fixed rental uplifts.

Who wants Green Leases?

The property industry is now confronted by the Government’s climate change agenda and the property industry itself is leading the calls for Green Leases. The following factors appear to be driving this development:

  • With the increasingly stringent building regulations that are being introduced (notably Part L), developers are being forced to build green buildings and Green Leases may be being used as a device to attract “Green Tenants”.
  • Property owners will be under pressure to improve the energy performance of their buildings as a result of the introduction of EPCs and Green Leases may have a key role in enabling the implementation of the recommendations that will form part of EPCs.
  • Occupiers have their own corporate social responsibility (CSR) policies and will wish to be able to demonstrate that such policies are being applied in relation to the management of their property.
  • Perhaps most tellingly, the industry is trying to “get ahead of the curve” and anticipate legislative pressure that may manifest itself in the same way as it has done in Australia.
  • Pension Funds have fiduciary duties to their beneficiaries and there is a growing view that these duties oblige fund managers to make investment decisions that have regard to issues of sustainability.
  • Company directors have new duties under Section 172 of the Companies Act 2006 to have regard “to the impact of the company’s operations on the community and the environment”.

What is the future of the conventional lease?

The conventional full repairing and insuring lease is once again in the public spotlight. It has already weathered a prolonged attack from the Government over recent years resulting in the various lease codes. Now the question is being asked whether the conventional lease is a barrier to the UK Government’s sustainability agenda.

The first question to ask, however, is whether sustainability issues do need to be addressed within the legal framework of a conventional lease or whether they can be dealt with by a more informal non-legally binding memorandum of understanding. Whilst there is no reason why a landlord and tenant cannot take these issues forward on a voluntary basis, problems may arise where, for instance, building improvements are carried out without having regard to the terms of the lease. If a tenant installs energy saving equipment in its premises, will that tenant be liable to reinstate those improvements at the end of the term under the reinstatement clause? Equally, if a landlord installs energy saving equipment in the building, are the costs of such improvements recoverable via the service charge?

A conventional lease will in many cases simply not cater for the situations that may emerge from voluntary agreement. It should also be borne in mind that neither of the most recent codes on service charges and leasing business premises makes any reference to sustainability issues. How long will it be before these codes are revisited?

Light Green or Dark Green?

It is also apparent that one type of Green Lease will not be suitable for all situations. What may be appropriate for a brand new “green building” may not be appropriate for a more outdated building. Green Leases themselves are likely to take many forms and a distinction is emerging between so called “Light Green” and “Dark Green” leases. In the table below we set out a menu of clauses that could appear in these different shades of Green Lease. The implications of these clauses will need to be carefully considered in each case. Certainly the introduction of some of the clauses set out in the Dark Green Lease column would signal a radical departure from the conventional “clear” or “net” full repairing and insuring lease. The Light Green Lease clauses, on the other hand, could more easily be accommodated within a conventional lease without fundamentally altering the balance of the relationship between the parties. Hermes are reported as being the first UK institution to sign a Green Lease and it is understood that it falls firmly in the Light Green Lease camp. Where they lead, other property owners will surely follow and it will not be long before occupiers also start to demand Green Leases. So the challenge for the property industry is to find a Green Lease model that will be accepted as the industry standard. The conventional lease, albeit slightly modified, may yet live to fight another day!

Green Lease Checklist