239: What are green leases?

A green lease of commercial property imposes obligations on landlord and tenant to minimise carbon emissions arising from the development, operation and occupation of a property.

A green lease will include wording that deals with (inter alia):

• obtaining and maintaining an Energy Performance Certificate (EPC);
• data sharing e.g. utilities consumption;
• recycling, waste reduction and waste management;
• using sustainable materials for repairs and alterations;
• water efficiency;
• measures to achieve target certifications such as Minimum Energy Efficiency Standards (‘MEES’) and Building Research Establishment Environmental Assessment Method (‘BREEAM’); and
• consideration of wider adverse climate impacts.

Green lease clauses have been around for a number of years, but their adoption is gaining momentum as ESG and climate change policies are pushed to the top of the agenda.

In fact, the Law Society has recently issued a guidance note on ‘Green leases and Minimum Energy Efficiency Standards’ which encourages solicitors and clients to use green leases to ensure properties are used as sustainably as possible.

Why use green lease wording?

Buildings contribute significantly to greenhouse gas emissions and the property industry is keen to drive energy efficiency policies for commercial property.

There is already limited legislation in place to deal with energy efficiency. Pursuant to MEES, from April 2023 it will be unlawful for a landlord to continue to let out a commercial property with an EPC rating of less than E, unless an exemption applies.

There is no legal obligation to enter into a green lease. However, businesses are now pledging to meet environmental targets and take steps to deal with climate change. For example, the NHS Trust seek to occupy energy efficient buildings wherever possible, and Marks & Spencer uses green lease clauses in all its retail leases.

Light, medium or dark green?

Green lease drafting does not need to be complicated. It can cover anything from light green wording, which sets out the parties’ intentions to co-operate on green issues but is not legally binding, to dark green wording, where the parties have set binding net zero targets.

New-build developers can ensure buildings are energy efficient at the point of construction but, as most of UK property stock already exists, building owners need to deal with energy efficiency retrospectively.

For leases that are already in place, the parties do not need to vary or legally change the lease. Landlords and tenants can enter into a memorandum of undertaking which sets out the intention of the parties to co-operate in order to increase a property’s sustainability.

The parties may agree to the creation of a building management group who oversee the implementation and compliance of green lease clauses. Data sharing, efficiency monitoring and sharing meter data provide a greater understanding of the energy, waste and water consumption of a building and how they can be improved.

Examples of green lease wording are available on various websites, including in the Green Lease Toolkit by the Better Building Partnership and The Chancery Lane Project.

You can read all of our backdated articles on the Real Estate page.