With the COP26 conference underway, the environmental impact of the built environment is understandably high on the agenda of the Scottish real estate industry.
It's often said that 40% of worldwide CO2 emissions can be attributed to real estate so it's no surprise that owners and occupiers of property are looking for ways to reduce the adverse effect that real estate has on climate change.
One of the tools that parties can use to implement positive changes is known as a green lease.
So what exactly is a green lease?
Firstly, to deal with a common misconception, a green lease is not a specific type of document and there currently is no industry standard "green lease" in place. Instead, it is better to understand the concept as being a series of provisions that can be inserted into the types of leases that we already use.
These provisions enable owners and occupiers of buildings to work together to reduce the environmental impact of those buildings and to improve sustainability. Typically, these provisions will deal with matters like:
- reducing carbon emissions;
- compliance with energy efficiency regulations;
- waste reduction strategies; and
- green transport measures.
There will also be a requirement under the lease to regularly report on these matters in a standardised fashion.
Just how green should your lease be?
Clauses covering these matters have been around for a while now although historically, the provisions have differed significantly in their complexity and enforceability, known colloquially as being different shades of green. Many green clauses in leases to date have been in the "light green" category, these being mostly aspirational provisions with nothing binding on the landlord or the tenant. For example, this could be reporting on the environmental performance of the buildings on an annual basis and keeping track of utility bill costs.
The reason for this light green approach was that parties were often concerned about what any more onerous provisions might do to adversely affect the value of the property or rent review provisions under the lease, particularly for investors who weren’t used to seeing these clauses in leases.
However, we are now seeing a trend towards more comprehensive "dark green" provisions being included in leases, particularly at the top end of the market. This is partially due to the Scottish government's drive to be carbon net-zero by 2045, but also because large investment funds and large corporate occupiers now have much more stringent ESG requirements when taking on new properties.
As a result, the trend towards green leases is not being driven by legislation (at the moment), but by the owners and occupiers of the buildings themselves.
The parties will need to be aware that the darker green provisions will impact a number of different areas of the lease - such as consent to alterations, service charge, and reinstatement at lease termination. Consideration will also need to be given to the appropriate consequences for breach of the provisions.
Are green leases here to stay?
Regardless of the specific green clauses used in a lease, there will need to be a collaborative approach between landlords and tenants for the provisions to be successful.
Landlords and tenants can both benefit from improving the environmental performance of building but there are some concerns that the darker green lease provisions could prove unattractive, or even unviable to potential occupiers. For example, a tenant in a short-term lease might be unwilling to implement costly improvements to a building if the payback from the work will only be realised after the lease has expired.
However, the ESG reporting requirements of organisations will likely mandate that large occupiers in particular need to implement at least a light green shade of lease in any new lettings, from a reputational perspective as much as any commitment to environmental change. There is also some evidence that buildings with green credentials are attracting a premium, both in capital value and in rental income.
There is not a one size fits all green lease that will be applicable to every organisation, but they are certainly something that the real estate industry is going to have to get used to over the coming years.