How to incorporate climate conscious drafting into your property lease

Sustainability and ‘green leases’ have been a hot topic for many years, but the extent to which meaningful provisions are included still varies, says Alexandra Holsgrove Jones

When it comes to green leases, what should be included? A prohibition on works that could damage the EPC rating is a start, but this is more focused on making sure the landlord isn’t in breach of the prohibition by continuing to let a sub-standard property (ie a property with an EPC rating of below E). The prohibition is not really designed to ensure that the property is used in an environmentally conscious manner.

Where climate conscious drafting is concerned, the key is collaboration between the landlord and the tenant – the issues should be discussed and agreed at Heads of Terms stage, and responsibility for different elements agreed.

The view that landlords are imposing obligations in relation to sustainability on tenants is rather outdated; we are increasingly seeing tenants putting environmental, social and governance at the top of their agenda and driving the conversations.

Cost continues to be a talking point – a tenant with a short lease will be reluctant to foot the bill for works that are going to disrupt its business and be of greatest benefit to the landlord’s investment value. However, works that reduce energy costs can benefit the tenant, not only through cheaper energy bills, but also by reducing its scope 2 emissions.

Issues to consider

• Will the parties be obliged to work together to improve the environmental performance of the property? How will this be monitored and enforced?
• Could the parties include circular economy principles for repairs and alterations, agreeing that re-used, reclaimed or recycled materials must be used, rather than new materials?
• What will happen to alterations on lease expiry? Could the standard position be that the tenant will not have to remove them, unless the landlord gives a requisite period of notice and only then if the alterations, if left in place, would adversely affect the future letting of the property?
• Will the landlord have a right of entry to carry out environmental improvements? What impact will this have on the tenant’s business? Who will pay for these improvements? Will they be picked up via the service charge? Will there be a service charge cap?
• Will the landlord be required to act reasonably in considering a tenant’s request to carry out alterations that improve the environmental performance of the building, even where these are outside the tenant’s demise (eg by putting beehives on the roof)?
• Will the parties be obliged to obtain electricity from renewable sources?

The extent of obligations, and the sanctions for failure to comply, will vary depending on the property and the parties involved. It may be too draconian for a failure to share data in relation to water usage, for example, to lead to forfeiture of the lease. Instead, it is more likely that the parties will agree to share data and collaborate to improve the environmental performance of the building.

Should leases go further?

The issues set out above directly relate to the property being occupied. Should leases go further and dictate how a tenant carries out its business from those premises? For example, should the tenant be obliged to source its catering supplies or office stationery from local, sustainable suppliers? Should the tenant be prohibited from using single-use plastic on the premises? Arguably, this goes too far and should not be dealt with in a lease. However, it may be appropriate for some properties, where environmental credentials are a key selling point, and the landlord only wants to let to like-minded tenants. The effect of such provisions in a lease on rent review is untested, so would need careful thought and advice.

Find out more

TLT works closely with the Chancery Lane Project and recently released a built environment climate contract tool, making it easier to find climate clauses that can be applied throughout the entire building lifecycle.

Alexandra Holsgrove Jones is a senior knowledge lawyer at TLT

Alexandra.HolsgroveJones@tlt.com