Green Leases – The Eco-Friendly Lease – What Are They? How Are They Drafted?

Green Lease

With ever-increasing awareness and pressure regarding environmental matters, many landlords and tenants will look to complete new or vary existing commercial leases that include provisions to actively promote a reduction in a building’s impact on the environment.

Various Government policies have come into force in recent years, such as the Minimum Energy Efficiency Standards (MEES) regulations, which are beginning to force developers, landlords and tenants to consider energy efficiency and the sustainability of a building throughout its entire life cycle.

How can a landlord/tenant be more environmentally friendly?

When considering the environmental impact of a building, landlords and tenants generally focus on the premises’ energy efficiency rating. However, the environmental impact of a build extends beyond this and includes:

  • Any alterations made to the property or refurbishment.
  • Average energy and water consumption.
  • Waste generation – all materials discarded, regardless of whether they are later recycled or disposed of in landfill.
  • Travel to and from the property.
  • The materials used to fit out the premises.

One way for commercial landlords and tenants to take steps towards improving the sustainability and long-term attractiveness of their lease is by entering into a green lease.

What is a green lease?

A green lease is a lease that incorporates numerous provisions to be observed by both the landlord and tenant as to how the building will be occupied, operated, and managed with a view to working as sustainably as possible. This can include sustainable operations, such as energy efficiency measures, waste reduction and management and water efficiency.

For example, a landlord may agree to:

  • Improve the efficiency of a property in order to meet a specific energy efficiency rating;
  • Separately meter the water and electricity consumption for each tenant;
  • Create and follow a green management plan that organises the green targets and plans that the landlord and tenant wish to meet; and
  • Ensure all plant and equipment – particularly air-conditioning systems – are operating at maximum efficiency.

Equally, a tenant may agree to:

  • Fit-out the premises using recycled materials or those which can be recycled;
  • Make all alterations energy-neutral/provide energy savings;
  • Observe and perform the landlord’s green management plan; and
  • Give the premises back with at least the same energy rating as at the beginning of the lease.

The green lease was first developed in Australia where it is now mandatory for all Government-owned and occupied buildings. Since being introduced in Australia green lease requirements have been introduced in London and throughout the UK.

Benefits of a green lease

While there are benefits to feeling that you are doing your bit to protect the environment, there is also a range of further benefits including:

  • Increasing the longevity of a building, which ensures increased rental returns and occupancy rates.
  • Ensuring that the building is maintained in accordance with its design – particularly following refurbishment.
  • Reducing the cost of operating and maintaining the building.
  • Meeting Corporate Social Responsibility (CSR) requirements.
  • Providing a ‘green’ work environment to tenants.
  • Improvements in public image and related marketing positions.

Many landlords may wish to attract tenants by offering green leases to show their commitment to reducing a building’s impact on the environment. However, existing tenants can also enter into a green agreement, known as a memorandum of understanding, which commits all occupiers and landlords to promote the energy performance of a building.

As well as providing a commercial benefit to landlords and tenants, a green lease is also perceived to offer a genuine long-term benefit to both landlords and tenants, as it ensures that developments are sustainably occupied, operated and managed in accordance with their design.

Why aren’t they more popular?

In short, costs. Whilst landlords and tenants will want the property of relevance to be environmentally friendly, neither will likely want to bear the cost associated with it.

The responsibility and cost for improvements to a property, that cannot be recovered via the service charge, are typically paid by the landlord. The landlord may be able to charge a premium for a property that is more environmentally friendly than other premises but will be dependent on there being sufficient demand and the overall cost benefit to a tenant.

It is important for landlords to bear in mind that any improvements to a property are long-term investments, which can provide many rewards to landlords and tenants over an extended period.

Drafting green leases

The wording of a green lease, clause, or memorandum of understanding will be dependent upon:

  • The property type.
  • Its environmental priorities.
  • The commercial requirements and budget of the landlord and any current or prospective tenants.

However, there is no widely used standard type of wording and the clauses used will vary in severity, categorised as:

  • Light – Limited commitment for both parties, extending to improving energy efficiency only. This typically doesn’t have a financial impact on the parties to the lease.
  • Dark – Significant commitment level, covering more issues than just energy efficiency leading to more substantial carbon reductions.

Responsibility for implementing and monitoring of green clauses should be agreed upon and outlined in a new lease or lease review process.

Green LeaseHow can Nelsons help?

For further information on the subjects discussed in this article, please contact Paul Hinchliffe (Partner), Sarah Burns (Senior Associate) or another member of our expert Commercial Property team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.

Contact us
Contact us today

We're here to help.

Call us on 0800 024 1976

Main Contact Form

Used on contact page

  • Email us