COP26: Focus on Sustainability for Commercial Tenants
This week, over 120 world leaders are coming together at the COP26 summit in Glasgow to pledge new commitments to help fight the global climate emergency. The Prime Minister, Boris Johnson, has described the summit as “the turning point for humanity”. This level of focus is encouraging many businesses to ask how they can ‘go greener’ and how they can make run their premises in a more environmentally friendly and sustainable way.
The question is particularly challenging for commercial tenants, who may feel that they are more restricted in terms of how they can better the environmental performance at their premises where they do not own the building. So, how might a corporate tenant make their premises more environmentally friendly and sustainable under the terms of their lease?
Altering the Property
The reality with many buildings is that improving environmental performance will often require physical changes to the property and upgrading technology and facilities to newer, greener solutions. Where tenants wish to undertake works to achieve a more environmentally friendly property, they will need to consider the terms of their lease carefully.
Many leases will impose limitations on the nature of works that tenants are permitted do to the property. To give added focus to the environmental performance of the property, modern leases often prohibit alterations to a property which would lower its EPC rating. Tenants must check the terms of their leases carefully to understand what works they might be permitted to make to their property and what terms and conditions might apply.
There may also be incentives in the lease with regard to tenant alterations which improve environmental performance and reduce energy consumption. Incentives might include disregarding such works on rent reviews (where they might otherwise lead to a higher rental value), reducing contributions to shared utility costs, or not being required to remove or reinstate alterations which improve environmental performance at the end of the lease.
Utility Supplies
Responsibility for arranging and paying for utility supplies will differ from property to property and will depend largely on how the landlord likes to manage their building.
Some tenants may like to have the ability to choose and swap utility suppliers (particularly electricity and gas) to suppliers whose energy is generated from renewable sources such as solar and wind. Tenants can enquire with their landlords as to what flexibility they have in this regard, and the lease may be worded in such a way as to expressly permit the tenant to choose their own utility suppliers and arrange their own utility supply contracts.
There may sometimes be less flexibility, where a tenant lets part of a building and the landlord arranges the supply of utilities for the building as a whole and recovers its cost through rent or a service charge. In those instances, environmental co-operation provisions might be helpful to give the tenant a voice to propose that the landlord shifts its energy supply to a renewable alternative.
Environmental Co-operation
Where tenants would like their landlord to share their green agenda, they may seek to agree lease provisions which encourage (or require) co-operation between landlord and tenant with the aim of boosting the sustainability of the property. The lease could give the tenant opportunities to suggest new strategies for improving environmental efficiencies at the landlord’s premises, though tenants should expect to be asked to contribute towards the cost of any new strategies which are implemented.
Some tenants may also wish to include reporting obligations in their lease to encourage the parties to share information regarding ongoing environmental performance at the property, such as regular updates on energy consumption, waste and emissions produced by the property. The lease may also refer to targets agreed between the landlord and tenant to keep consumption, waste and emissions below certain levels. Some leases may even include tenant incentives in this regard, such as reduced service charge payments where environmental performance targets are consistently met.
Of course, every lease is different, so the first step should always be to review the terms of the lease carefully. You may find that some of the above provisions already exist, but they may be qualified or subject to caveats.
Times are changing in terms of how the market perceives “green leases” and we are seeing an increase in the number of clauses found or requested in leases to promote sustainability – including some of the points mentioned in this article. They are still rare, but as businesses focus even more on promoting sustainability we may well see more growth in their use.
Organisations such as Revo and The Chancery Lane Project are working to come up with fresh ideas for greener lease clauses (which of course would need to be tailored to suit particular transactions). Some landlords are welcoming these proposals where they are appropriate for their buildings, but generally they remain a point of negotiation and expert legal advice should always be sought.
The above is a general overview and we recommend that independent legal advice is sought for your specific concerns. If you require further information in relation to the points raised in this article you should contact Ben Butterworth, a solicitor at Charles Russell Speechlys LLP in the Real Estate team. Ben can be contacted on ben.butterworth@crsblaw.com.
