Is the ‘green lease’ achievable or a misconception?

What are the differences, benefits and pitfalls for landlords and tenants trying to get their energy and environmental documentation right? Julian Pyrke explains

In today’s property rental market, everyone wants a green lease. However, there are barriers. The most notable being who actually pays for the environmental improvements, as they would usually be the landlord’s responsibility but the tenant derives the benefit.

This is often referred to as the “split incentive” and solutions include a tenant’s service charge, a separate sinking fund for improvement or Government initiatives such as the Green Deal.

At the moment it appears we are in something of a hiatus period until it is firmly established how these improvements actually affect values of properties. On what basis are the improvements to be valued and will this lead to the much discussed two-tier market, with environmentally friendly buildings commanding a premium?

The element of trust between landlords and tenants is an issue which is generally tackled through education and mutual understanding. The British Property Federation advises that “landlords and tenants should each adopt an environment of good practice polices as far as they can do so without adversely affecting the value of their buildings or the viability of their businesses”.

I would concur with this sentiment and suggest that it is a matter of raising and dealing with issues earlier rather than later since, environmental considerations aside, it is not difficult to see that the Government will seek to raise revenue from buildings that do not have a low energy use.

In reality, the green lease is something of a misconception. They are really collections of different clauses which can be contained within a legal document, such as a lease or a memorandum of understanding (MoU).

Despite this, the Better Buildings Partnership, which has been one of the drivers for green leases, has produced a green lease toolkit with some suggestions as to what these clauses may look like, and what they might contain. The clauses don’t just deal with the energy efficiency of a building, they often go much wider, for example into water management, waste management and green transport.

So how do you encapsulate all the aims and objectives of both the landlords and tenants within an agreed document?

The approach taken is to use different shades of green in different formats: “Light green” leases tend to have clauses which aren’t legally binding or where a breach of the provisions would not lead to a landlord’s ability to bring the lease to an end. Currently most commercial leases fall into that category because landlords want tenants to pay rent.

“Dark green” leases are less common – they tend to be on large multi-let buildings like shopping centres – and can contain some quite onerous provisions. Consideration needs to be made as to the relationship between a breach of those “green clauses” and the landlord’s ability to forfeit the lease, since if the landlord can instigate forfeiture proceedings then the tenant needs to ensure that they are in a position to comply with those requirements.

“Medium green” leases lie somewhere between the two, with a middling scale of onerousness of those environmental clauses that sit within the body of the commercial lease or other ancillary documentation.

Therefore some thought as to the shade of clause and where that clause sits – within a commercial lease or perhaps outside the lease – needs to be considered.

If the clauses are to sit outside the commercial lease then a landlord may want to look at alternatives, such as tenant’s regulations, estate regulations and a tenant’s handbook, which deals with the environmental use and obligations (a common approach for multi-let buildings).

They might also want to look at agreeing a MoU, which sits outside the lease and can be just three or four pages long, reviewed every year and upon a change of tenant, and can deal with the creations of joint management committees, the use of data sharing for energy, waste and so on.

Julian Pyrke is the head of commercial property at Gregg Latchams LLP

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie