CBRE Consultancy: Green lease increasingly popular

Chris Richards, Senior Director at CBRE Building Consultancy explains what a green lease entails, and explores whether they’re a benefit, or a burden.

What is a Green Lease?
Quite simply, a green lease is a standard lease with additional clauses to provide for the management and improvement of the environmental performance of a building. The terms are set at the beginning of the tenancy and are legally binding for the term of the lease.

Where there is an existing lease, parties may choose to adopt a Memorandum of Understanding. This is a written agreement with similar objectives to a green lease but it is not legally binding and can be amended and refined during the tenancy, also its life is not tied to the lease period. This is often a preferred approach as it can provide a faster route to agreement.

Challenges
In commercial property, the objectives of the landlord/owner and tenant/occupier have not always been wholly aligned: their overall perspective in terms of timescale for the life of the building and the lease will differ, and as such the payback period associated with any improvements. This institutional relationship can be adversarial, and so, as with any joint initiative, it will take time to build trust. Similarly where leases already exist it can take some time (and money) to agree any amendments to an existing legal document.

Reasoning/why bother?
Initial pressure, especially throughout the recession, was to reduce costs and comply with legislation – savings in energy costs and rising standard in legislation such as Carbon Reduction Commitment and Energy Performance Certificate meant that there was pressure on both landlords and tenants to work together. However, there is now an increasing awareness of the value aspects, with landlords beginning to see links between capital value/rent and green credentials and tenants/occupiers realising workplace productivity, customer satisfaction and reacting to the attitudes of high calibre ‘generation Y’ staff.

Examples of what is included
To be effective, a green lease or memorandum of Understanding needs to be more than just platitudes but rather contain practical measures to make the commercial property more sustainable. It also needs to fit with the individual circumstances and as such aims to provide a framework to overcome the inherent division of responsibility and diverse incentives associated with a traditional lease.

• Cooperation – a mechanism for sharing of data, including a forum for discussion, agreement, and communication to those involved including staff training
• Energy metering – provision for audits and management along with a maintenance programme and plans for improvements e.g. lighting systems and low carbon technologies
• Water and waste management including recycling plans
• Implementation plans for any works undertaken and consideration of any reinstatement provisions where ‘improvements’ might be beneficial
• Staff involvement such as green transport plans and creation of bio-diversity areas
• Financial arrangements – principles should be set for each scenario having regard to the level of investment, payback, service charge and rent review provisions

Way Forward/The Future
There are already examples of significant benefits for those buildings which use high levels of energy and water and produce a lot of waste. But green leases are still seen by some as contentious and there is a reluctance to embrace them fully. 

Indeed we have experience of solicitors deleting clauses from draft leases even though both the landlord and the tenant have signed up to the general ethos conveyed by those terms. Similarly, developers hesitate to accept planning conditions out of fear that the additional constraints will deter prospective tenants or purchasers. There is clearly a need for more education about green leases in the property industry.

Additionally, no doubt, there needs to be not only collaboration between the two parties but also commitment to achieve success. But the rewards are clearly evident. Energy costs and legislative requirements are only going in one direction, so the benefits can only increase. The concept of green clauses within a modern lease situation is closely linked with the overall development of commercial lease structures and durations, but trends in Asia Pacific indicate that they are increasingly being seen more as a benefit than a burden.