Occupiers are increasingly exposed to the risk of paying for Landlords improvements to the environmental performance of their Buildings.  Here’s why…

Green leases are gaining in popularity as a method for Landlords and their Occupiers to promote sustainable and environmentally friendly practices in the management and operation of property.   

With the UK Government having set a target of being net zero by 2050 and the increasing requirement to offer ESG benefits, Landlords are going to need to make buildings more energy efficient as well as offering environmentally friendly services to attract Occupiers.   Along with the net zero targets, the introduction of MEES (Minimum Energy Efficiency Standards) will mean that that properties with lower EPC ratings will be unable to be let, further driving the focus on energy performance.  The cost of upgrading all of the UK retail space alone to the new standards is estimated to be up to £90billion, it is not clear who will be footing the bill…. 

Green Service Charge provisions are therefore being introduced into standard lease drafting, requiring both parties to co-operate together and create formal measures to reduce the building’s environmental impact, by improving energy efficiency, reducing waste, and promoting sustainable transportation.  

The problem for Landlords is that many leases agreed in the last 20 years or so don’t allow for a sinking or reserve fund and do not allow for the replacement of equipment unless it is beyond economic repair.  This can make it difficult to recover the cost of some environmental improvements such as renewable energy initiatives or LED lighting.  

To achieve the Government targets, comply with regulation and uphold their own sustainability goals, Landlords will want to see lease terms that allow the recovery of the costs of improving the environmental performance of their buildings through the service charge.  This might include the use of and reuse of sustainable materials, renewable energy solutions and metering of consumption, sustainable procurement, and strategies for reducing the amount of waste to landfill, as well as cooperation to maximise the energy efficiency of the building or Scheme.  

How the responsibility for these new costs is to be shared between the Landlord and their Occupiers must be given early consideration in any lease negotiations, so that both parties are fully engaged with the objectives.   Caps, exclusions, and all-inclusive rents can all offer opportunities to limit exposure to these new costs, but Occupiers should also look out for sweeper clauses that allow for new green items to be added to the service charge at a later point.  

For now, green service charge provisions are likely to be most effective in longer term lettings of offices headquarters and logistics developments where sustainability credentials will be under scrutiny due to corporate ESG requirements.  However, it is also clear that the introduction of green service charge terms will be increasingly common for all, and it will be important for occupiers to understand the service charge cost implications, as well as the potential benefits. 

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