02/11/2009

Be aware of the rise of green leases

Green leases contain provisions obliging or encouraging the parties to the lease to co-operate to reduce the effect of the premises in question on the environment.

Leasehold obligations can be absolute requiring strict compliance by the tenant in certain areas such as recycling of waste, use of water and energy, the type of lighting that can be used or specifying the sustainability criteria of materials permitted for alterations.

Alternatively, leases can simply contain an expression of intention.  For example, this could be that the parties will cooperate with the aim of reducing the environmental impact of the premises in certain specified areas.

Obviously, the degree to which the provisions can be enforced will depend on whether the provisions are mandatory or not.

Those currently promoting the green lease movement are a small number of large institutional landlords and others with green reputations. In addition to the obvious global benefits of reducing CO2 emissions, there are other benefits to tenants in committing to greener buildings and green leases.

Apart from the potential cost savings of following green practices, another selling point of green leases is that they can enhance the reputation of a company and its perceived social responsibility.  Many companies will want to ensure that their public image does not portray them as uncaring about the effect of their business on the environment.

Another consideration is that whilst building valuations do not consider green issues at the moment they may well do so in the future. Buildings of higher environmental performance will have ‘insured’ against the cost of having to comply in the future by improving now.

A further benefit relates to the increased legislation in the area of energy efficiency.  Landlords and developers will need to ensure buildings are constructed to meet higher environmental standards. This will prevent costly alterations being required in the future and generally to make buildings comply with the trend towards greener buildings.

This can be seen in the regulations that introduced energy performance certificates which measure the energy performance of buildings and recommend improvements. Further legislation in this area is set to continue with the CRC Energy Efficiency Scheme (CRC) previously known as the “Carbon Reduction Commitment” set to come into force in April this year in a number of phases.

The CRC will introduce a system whereby organisations affected will have to buy sufficient allowances to cover the amount of CO2 generated by their buildings or the activities carried on.  There will be financial penalties for those organisations which do not have enough allowances and good performers will receive a refund of money spent in buying surplus allowances.

Organisations affected by the CRC are those which have energy bills of £500,000 or more per annum.  The important point to note is that this is measured across all of the UK sites of an organisation and will therefore affect not just large single site occupiers. All types of organisations from national retailers to hotel chains, supermarkets, banks and local authorities will be affected.

Finally, staff and customers may feel much better about buildings with greener credentials and working or visiting such premises may enhance the experience of using these buildings.

Whilst there are the obvious benefits to the environment as well as a feel good factor green leases still face a number of obstacles to becoming more widespread.

The main objection to green leases must be a tenant’s fear of the increased cost of having to comply with higher environmental standards.  These could be due to the increased costs of permitted alterations or increased service charge costs if landlords are committed to potentially expensive energy saving objectives. Tenants will need to be convinced that cost savings outweigh costs incurred.  These fears will be exacerbated where the length of the lease term is short.

Landlords will also need to be sure that energy saving improvements result in higher rents or property values and that, where costs are on-going, these can be recovered via service charge.

Not all buildings will be capable of complying with environmental requirements.  Older buildings will struggle to compete with new buildings constructed in accordance with current UK building regulations. It will obviously be easier to incorporate green provisions into leases of newer buildings more capable of achieving higher environmental efficiencies.

For retailers, much of the existing commercial property stock is at high street locations where costly alterations may be necessary to older buildings in order to achieve energy savings.

In conclusion the take up of green leases appears still to be low in the UK.  This appears to be mainly because there is a lack of incentive in the current economic climate where the main drive for landlords is to complete lettings and fill voids.  This means that tenants suspicious of increased costs can successfully remove green provisions from leases, at least in the current market.

At Gordons, we are seeing more leases which have green elements, although most have very general principals which are more about a party’s intentions than mandatory obligations. Parties still need to be persuaded of the benefits of green leases which will realistically only occur once a tenant’s attention can be focused on areas other than surviving the current economic climate.

However, it may well be that if parties don’t start to co-operate and find ways to ratify green elements into their lease arrangements then it may be only a matter of time before legislation makes such provisions obligatory. This would mean that the requirements of green leases are taken out of the hands of the property industry.

If you wish to discuss the issues outlined in this article, or any issues around commercial property, please contact Joanne Fearnley on 0113 227 0100 or e-mail: joanne.fearnley@gordonsllp.com .