Green Leases.

'Green Leases' are an Australian invention, and are becoming more and more common in the UK. They encourage the landlord and tenant to work together by creating environmentally friendly policies which enable the increase of a building's energy efficiency, by reducing its energy consumption, water usage, waste production, and by other environmentally focused actions.

Meanwhile, European legislation has introduced the energy performance certificate (EPC), which gives information about the estimated energy consumption of a building, as opposed to the machinery and appliances inside. This allows purchasers and occupiers to determine a building's green credentials at the time of purchase, or entering into a lease.

From 4 January 2009, an EPC will be needed for the sale or lease of any commercial building, and will need to be displayed in public buildings of over 1,000 square metres, such as sports centres, schools and hospitals. For residential property, an EPC will be required for any sale from 1 December 2008.

For commercial property developments such as new shopping centres or business parks, energy efficient measures could include using renewable or recycled energy sources. Developers can also negotiate an extension to the existing public transport network to allow easy access to and from the new property, and can provide cycle racks and internal estate cycle paths. Existing properties can be similarly adapted to become more environmentally friendly, and the cost involved can be quickly offset by the savings achieved.

Green leases contain extra clauses that are intended to reduce the environmental impact of a building and improve the workplace. These provisions would typically include a restriction against the tenant from carrying out any works or alterations that reduce the environmental performance of the building, or adversely affect the ratings contained in the EPC. The tenant should be required to fit-out or alter the property using materials that have been, or can be, recycled if at all practicable. Any work carried out should also be energy neutral or provide energy savings and should not compromise the building's environmental credentials. For example, the tenant should not install partitioning that makes the air conditioning system less efficient, thus causing more energy to be used.

The tenant should have to give back the premises at the end of the lease with at least the same energy rating as at the beginning of the lease and should not remove any works or alterations that have achieved an energy saving.

The landlord should be entitled to carry out repairs and alterations to the property to improve energy efficiency and if these create a cost saving for the tenant, then the landlord should be able to recover the cost of the work. The landlord could provide recycling bins or facilities, and if so the tenant should be encouraged to use them. The landlord may want to include assumptions in the rent review clause about the environmental performance of the building, so as to reflect the positive measures contained in the lease itself; however landlords of other properties may want to build in positive assumptions to the clause so as to pretend that a lease is environmentally friendly when in fact it is not, and to try to obtain an unfair advantage at rent review.

However, they should not be too zealous in imposing environmental measures on their tenants, because the tenant can argue at rent reviews that any increase in rent should be suppressed because his lease is too onerous. Despite the potential for such occurrences, as green leases become more common, a suite of generally acceptable clauses is likely to evolve, and these will become the market norm, meaning that there will be no disadvantage to the landlord at rent review.

Tenants largely welcome green leases due to the reduced energy costs, the fact that the lease "measures up" environmentally, and the greater marketability of the lease. Tenants are generally more aware of the enhancement in reputation that comes with being seen to be environmentally pro-active and their employees are increasingly aware of environmental issues and the importance of their well being at work. It is thought that an environmentally friendly workplace can help attract and retain staff, improve productivity and even reduce absenteeism.

Landlords may find higher tenant demand for a building that has a low environmental impact and lower running costs; and that property lenders may well prefer to lend in respect of a property that ticks all the right environmental boxes. If buildings that are not environmentally friendly are less attractive to tenants, they will command a lower rent than those that are. They will take longer to re-let and they will have higher running costs, especially for energy.

As this becomes the norm, many corporate and government occupants in the UK will not choose to occupy a building that does not meet their environmental criteria. Property investors and lenders are starting to focus on sustainability and the energy costs of properties. With this pattern emerging, perhaps the environmental improvement of properties will come as a result of commercial pressures, rather than environmental enlightenment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Ken Gerber

Anderson Strathern LLP 

1 Rutland Court

Edinburgh

EH3 8EY

UNITED KINGDOM

URL: www.andersonstrathern.co.uk

Click Here for related articles

(c) Mondaq Ltd, 2008 - Tel. [phone] - http://www.mondaq.com