What does a green lease mean for your business?

21 June 2012
What does a green lease mean for your business?

Forward-thinking landlords and tenants are beginning to agree obligations relating to the environmental impact of a property. Debra Kent explains

Some "green" obligations may be expensive or difficult to comply with and even if you consider them reasonable, a subsequent buyer of your business may not be so keen.

The provisions may extend beyond property-related matters and have adverse operational implications. However, increasing environmental regulation and the emphasis on energy efficiency means they cannot be ignored.

There is currently no legal requirement under English law for landlords and tenants to enter into green leases, although many think that this will happen in due course.

However, provisions in the Energy Act 2011 state that from April 2018 it will be unlawful to rent out a property that does not reach a minimum energy efficiency standard - currently proposed to be "E". Inevitably, lease provisions covering this will follow.

Green lease clauses
Green leases may include requirements to use the premises in a way that reduces carbon emissions and minimises energy usage.

The wider environmental impact of the business might also be covered. Improved water use efficiency; increased resources and waste efficiency; limitations on potentially polluting substances; voluntary adherence to green transport policies and the use of sustainable and local materials in the business are just a few of the requirements.

The business implications of these could be significant and the materials restrictions could affect consents for alterations and reinstatement obligations.

Is it only the tenant who is affected?
Although the focus is often on the tenant's obligations, this is because the tenant is often responsible for how the property is operated. Leaving the windows open while the heating system is on will not help a building's energy efficiency even if the building was constructed to be environmentally friendly.

The landlord can be responsible for green obligations, too - especially if the building is multi-let and they control common areas, heating and air-conditioning systems and waste removal. Service charge provisions can include green objectives and obligations.

Types of green lease
Dark green leases have legally binding environmental obligations requiring a high level of commitment and real consequences for breaches. These are relatively rare in the UK.

Light green leases include references to environmental aspirations (usually restricted to energy efficiency) and tend not to be legally binding.

UK green leases are more likely to be medium green leases - falling between the two.

Energy Performance Certificates
The most common green clauses seen in modern leases relate to the Energy Performance Certificates (EPCs) for the property. These prohibit the tenant from doing anything to reduce the energy rating of the premises.

Care needs to be taken when agreeing these clauses as some building works may have this effect - irrespective of your wish to comply with corporate social responsibility policies and to be energy efficient. For this reason most tenants' lawyers do not agree to these restrictions for fear of the unknown impact of the provisions. Current market conditions are such that many landlords' lawyers agree that these obligations need not apply. However, this is likely to change - especially if and when the powers in the Energy Act 2011 dealing with restrictions on letting energy-inefficient buildings are implemented.

When faced with a green lease consider whether:

â- The cost of compliance is prohibitive
â- A buyer would be put off by the obligations
â- Compromise is possible - complying with objectives in a cheaper way
â- Phased obligations over the lease term might be preferable
â- Compliance may actually make the property more attractive to a buyer
â- The landlord is doing his or her fair share

While green leases are not yet standard and have some novelty value, they will become more common.

Additional environmental regulation will inevitably make some of the provisions compulsory in the future - certainly in relation to EPCs.

Debra Kent is head of real estate at Charles Russell LLP

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