Promoting environmental sustainability in Scottish commercial leases is now firmly part of discussions between landlords and tenants. As a team, we are now seeing this discussion expanding into the parties wider social and governance objectives and, in particular, compliance with anti-corruption legislation.
In this article, we consider this development and how it may affect commercial leases in Scotland.
The 'S' and the 'G'
As sustainability becomes increasingly important to society, assessing real estate opportunities solely on the basis of environmental credentials may no longer be sufficient to demonstrate a real commitment to the cause. Landlords and tenants are increasingly keen to display a broad ESG strategy that addresses each of the environmental, social and governance considerations, and to assess how the agreements in respect of their property portfolio evidence their promise.
The types of social objectives that may become more prominent in discussions will depend very much on the context - with the asset, sector and identity of the parties all having a bearing. Proposals may range from a softer recognition of a general commitment to ESG to those which address specific business concerns.
The latter has started to emerge in commercial leases in Scotland, with the inclusion of anti-corruption and anti-bribery clauses.
Generally, these clauses seek to impose an express positive obligation on a tenant to comply with all applicable anti-money laundering, anti-bribery and anti-corruption laws and may also address compliance with modern slavery and human trafficking legislation. This obligation is in addition to the standard compliance with law clause generally imposed on tenants – which landlords may argue only imposes a minimum legal standard and does not meet their own, perhaps optimistic, ESG strategy that they want to bring to the market.
In addition to evidencing a strong ESG outlook, the intention of the clause is to increase the landlord's likelihood of successfully establishing that a material breach of the tenant's obligations in the lease has occurred where a tenant falls foul of the relevant anti-corruption etc. legislation. This then allows the landlord to irritate (forfeit) a lease relatively quickly following the breach and distance themselves from the purported misdemeanours of the tenant.
As it currently stands, it is unlikely that tenants will accept a landlord's ability to terminate a lease due to tenant failure to comply with the social and governance agenda – which is still seen as an internal matter and not relevant to the landlord/tenant relationship.
Landlords will also need to be accepting of the fact that tenants would want to impose an equivalent commitment from the landlord, which may impact on their wider property portfolio.
While anti-corruption clauses are by no means commonplace in Scottish commercial leases, current trends indicate that social considerations are becomingly increasingly important to investors. While the exact nature of these clauses develops, parties are advised to seek specialist legal advice from Brodies to navigate the impact of the evolving sustainability agenda on commercial leasing.
Please get in contact with the either Danny George or Emma Barnett in our retail and leisure team if you would like to discuss in more detail.