ABOUT GREEN LEASES

The built environment has a significant environmental impact - it is estimated that it contributes to approximately 25% of the UK’s carbon footprint The sustainability impacts of buildings occur throughout their entire lifecycle from design and construction through to operation, refurbishment and demolition. Accountability for these emissions lies not only with the owners who develop, refurbish and manage buildings, but also with occupiers who drive occupational standards and govern the activities that take place within commercial buildings. In a recent review of BBP Climate Commitment Signatories Net Zero Carbon Pathways, we found that Scope 3 emissions can make up over 85% of owners carbon footprints. Buildings can also be engines for driving positive impacts. They support communities through job creation, they stimulate local supply chains, and they reinvigorate sometimes underutilized areas creating safe, welcoming and prosperous places to live and work in.  

Building owners (“Landlords”) and occupiers (“Tenants”) therefore share a responsibility to enhance the environmental performance of buildings and also an opportunity to unlock potential for greater societal value. Green leases are one tool, along with positive and open dialogue, which can help to transform the environmental and social impact of a building.

Green leases are needed to ensure that there is a sound legal framework in place that establishes the roles and responsibilities for the delivery of environmental and social outcomes and they can also provide a springboard to unlock wider collaboration beyond the specific terms of the lease.

This toolkit aims to enhance collaboration between owners and occupiers and support their interactions on sustainability. It provides practical guidance on incorporating environmental and social issues into the leasing process, including a guide to green lease essentials and model clauses.  

A green lease is a standard form lease with additional clauses included which provide for the management and improvement of the environmental (and social) performance of a building by both owner and occupier(s).

Such a document is legally binding, and its provisions remain in place for the duration of the term. A green lease, therefore, represents the firm commitment of both owner and occupiers, to take action on sustainability.

A green lease does not automatically result in a more environmentally efficient or sustainable building. At the end of the day it is simply a piece of paper. Commitment is required from both parties to fulfil the aspirations and commitments agreed and to work in partnership to address the environmental and social impacts of the building(s) they own and occupy. 

This toolkit does not provide guidance on how to improve the performance of commercial buildings - the BBP provides a wide range of tool kits to support this which can be utilised alongside the Green Lease Toolkit. Of particular relevance are:

• The Green Building Management Toolkit 
• The Responsible Property Management Toolkit
• The Transactional Agents Sustainability Toolkit
• The Responsible Fit-Out Toolkit
• The Managing for Performance Framework 

Of course, these are only the resources that the BBP provides – there are many resources available across the built environment sector and we encourage owners and occupiers to make extensive use of guidance provided by a wide range of organisations including BPF, BCO, RICS, BRC, UKGBC. 

For a Green Lease to be agreed and effective will require engagement throughout the leasing process. A green lease should not only be discussed when the terms of a lease are being drafted, but from as early as possible in the leasing process (including Heads of Terms), during the term of the lease and when the lease concludes.  

Green leases are one mechanism that can help to deliver better performing buildings for both owners and occupiers.  Sustainable buildings can bring multiple benefits to both parties and, more specifically, when designed well green leases can:

• Support compliance with legislation helping owners and occupiers to comply with existing legislation and to prepare for upcoming legislation.
• Support improved building performance securing owner and occupier agreement around specific commitments and actions.
• Contribute to cost savings securing owner and occupier commitments to improve resource efficiency.
• Incentivize investment  enabling owners and occupiers to design leases that improve building performance in a mutually beneficial way. 
• Improve working relationships creating a strong foundation for more meaningful owner-occupier engagement on sustainability issues. 
• Improve data and reporting enabling owners and occupiers to more accurately account for their impacts and measure progress towards their strategic sustainability goals.  
• Support corporate sustainability goals aligning owners and occupiers on building related sustainability objectives such as EPC ratings and specific building certifications (e.g. BREEAM, NABERS, WELL).  
• Foster strong employee engagement, recruitment and retention walking the talk of sustainability in the leasing and occupation of buildings.  
• Enhance reputation and market differentiation demonstrating leadership backed up with action, strengthening relationships with a wide range of stakeholders including Government, local and planning authorities and local communities.  
• Increase the attractiveness of the building to occupiers and investors seeking to ensure that sustainability is reflected in their choice of building, this can result in reduced vacancies, time taken to let, lease lengths achieved and strong renewal rates.  

All of these benefits can be realized in financial and non-financial returns, reducing business risk and lowering investment risk ultimately creating more valuable assets for the environment, the economy and society. 

Owners and occupiers want great buildings that are fit for purpose, resource and cost efficient, safe and comfortable. Increasingly, investors, employees and customers want to know that the buildings they invest in, occupy or use, are taking measures to reduce any negative environmental and social impacts they may have. This context, along with increasing regulation/ legislation and pressure to support the UK’s net zero (and wider sustainability) commitments, provides a significant opportunity for owner and occupier alignment on sustainability in pursuit of their financial and non-financial goals.  

Green leases can act as a practical and powerful tool for owners and occupiers to connect on sustainability. However, In the past, leases have been perceived by some as a tool for delineating responsibilities and accountability, with the ‘split incentive’ being highlighted as a common barrier whereby investment and/or costs borne in improving the building do not flow back through to the owner or occupier in a fair, equitable and transparent manner.   

How does the toolkit address the issue of cost?

Cooperation is at the heart of the success of a green lease. The BBP understand that the issue of who bears the costs of implementing sustainability aspects can be a difficult one to navigate and that this needs to be taken on a case by case basis in a conversation between owner and occupier. The toolkit does however make recommendations around two scenarios: 
 

• If the works will result in cost savings by way of reduced energy or other utility costs for the Tenant, the BBP considers that it is reasonable for the Tenant to contribute to the costs of the works to the extent that it will enjoy cost savings. How this is achieved should be a matter for agreement between the parties. 
• Where the works are to the Premises then the costs of these are unlikely to be recoverable under a service charge and consideration should be given to including any cost recovery arrangement agreed by the parties in this clause entitling the Landlord to carry out these works.  

There are several international examples of cost recovery principles provided in the toolkit to support this area: 

• The Australian BBP (BBP Leasing Standard Template Clauses | Better Buildings Partnership) includes a provision that the Tenant will contribute to the cost of relevant improvements provided this contribution "does not exceed a reasonable estimate of the cost savings to be made by the Tenant as a consequence of the works".  
• The Green Lease Leaders initiative in the US seeks to recognise via a ratings system landlords and tenants who have implemented energy efficiency in leased spaces. It suggests the following clause to deal with cost recovery of improvement works: "Landlord may include the costs of certain capital improvements [intended to] [that] improve energy efficiency in operating expenses of tenant space. The amount passed through by Landlord to the Tenant in any one year must not exceed the prorated capital cost of that improvement over the expected life cycle term of that improvement [and must not exceed in any year the amount of operating expenses actually saved by that improvement]. Interest/the cost of capital can be included."
•  The Energy Aligned Clause developed at the instigation of the City of New York in 2010 to solve the split incentive obstacle follows similar lines but restricts annual recovery from tenants to 80% of predicted energy cost savings to provide a buffer for the Tenant against underperformance of the works (+/- 20% against predicted savings was found to be the norm based on industry experience). 
• The Institute for Market Transformation in the US has published Green Lease Language Examples - IMT which include a number of examples of cost recovery clauses for the cost of improvement works. 
• The BBP is continuing to explore ways in which the costs of works which Improve the Environmental Performance of the Premises can be shared in a way which is fair for both parties.

Green leases can also sometimes be seen as contentious. This is often due to a lack of understanding of what they are designed to achieve and how they work. The ‘green’ clauses in a lease may be struck out by lawyers because the wording is unfamiliar, sales and lettings agents may advise clients against considering a green lease for fear that by doing so a deal may be delayed or even de-railed.

This context has meant that even though owners and occupiers usually have their own ambitious sustainability goals, embedding concrete action in a lease can fall into an owner and occupier gap. This impasse is critical to overcome, especially as short-term leases, which by nature disincentivize long term thinking, are becoming more common. This green lease guidance attempts to plug the owner and occupier gap and build a bridge for both owners and occupiers to come together. It is intended as a practical guide, enabling both parties to utilize clauses in a manner that is consistent with their own goals and objectives and without unfairly penalizing one party.