A recent round table offered an update on the state of green leases in the UK. Julia Patrick, Sue Bright and Claudia Jaksch share some of the industry and policy perspectives explored during the discussion
Participants at the round table included:
- Dr Alan Whitehead MP
- Better Buildings Partnership
- British Board of Agrément
- Department of Energy and Climate Change
- King & Wood Mallesons
- Marks & Spencer
- Nabarro
- TLT Solicitors
- University of Oxford
- Westminster Sustainable Business Forum
- Willmott Dixon
Six years after the Better Buildings Partnership (BBP) launched its first Green Lease Toolkit and a little over two years after Estates Gazette reported on progress in green leasing (“Going Green”, 8 December 2012, p58), academics from the University of Oxford teamed up with the Westminster Sustainable Business Forum (WSBF) to seek current industry and policy views on the use of green leases in the UK commercial sector, with a focus on retail.
Their round table discussion in March – chaired by Dr Alan Whitehead MP and attended by 15 participants, including retailers, lawyers and policy makers (see box) – set out to explore the recent development of green leases alongside the development of Minimum Energy Efficiency Standards (MEES), and the impact of these developments on both the landlord-tenant relationship and environmental practices in commercial buildings.
The discussion highlighted a number of key themes and issues, including the impact of MEES; policy and market developments needed to improve energy management of commercial buildings; reasons for promoting and resisting green clauses; and the role of green leases in promoting environmental and energy management.
MEES were a central theme. MEES will be introduced with effect from April 2018, when it will become unlawful (with certain exceptions) to rent out commercial properties that do not meet a minimum energy performance certificate (EPC) rating of E.
A tangible benchmark
Participants at the round table suggested that MEES – described by one as a “game-changer” – will provide a tangible benchmark and it has already had a more significant impact on the real estate sector than many other energy efficiency policies. There were suggestions that the prospect of MEES is starting to affect property value, and that investors are increasingly taking note.
Nevertheless, MEES regulation may not be capable of improving energy efficiency in the commercial sector on its own. Participants raised concerns that the operational performance of buildings remains largely unaddressed, reflected in the government’s emphasis on the asset-focused EPCs and its reluctance to make display energy certificates (DECs) mandatory in the private sector. The National Australian Built Environment Rating System (NABERS) regulations, which distinguish between tenants’ parts and the base building, were praised as a good example of a non-domestic energy efficiency policy. NABERS measures the energy efficiency, water usage, waste management and indoor quality of a building or workplace, as well as its impact on the environment. In 2013/14 it became a legal requirement for any Australian building over 1,000m2 to have a NABERS rating. The round table agreed that the Australian government’s effective leadership has helped link environmental standards to property value as occupiers are demanding certain NABERS ratings as a minimum requirement before taking up leases.
In addition, one participant identified the need for an appropriate financial mechanism to enable an effective response to MEES, supporting energy efficiency building improvements and, in particular, to help overcome the “landlord-tenant divide”.
Green leases
The advent of MEES has highlighted the landlord-tenant divide, also referred to as the “split incentive”, where the differing property interests and obligations of owners and occupiers mean neither has sufficient incentive to invest in energy efficiency upgrades. Participants recognised this as a key challenge for effective energy management in the commercial property sector, creating additional complexity.
In this context, the practice of green leasing has received increasing attention as one tool to facilitate co-operation between landlords and tenants. Green leases are lease contracts that include provisions enabling or encouraging landlords and occupiers to work together to improve the environmental performance of a building.
Green clauses can take a number of different forms, including terms that specifically seek to promote co-operation on environmental and energy management, as well as terms that seek to prevent environmental harm.
To date, green leases, it was suggested, have only achieved significant traction in Australia, where there is more of a link between environmental standards and property values. In the UK, by contrast, the uptake of green leasing practices appears to have been less widespread.
It was recognised that there had been some uptake, particularly among BBP members and in the office and prime building sectors. In the retail sector, however, evidence to date suggested that green leasing practices were still in their infancy. Marks & Spencer was highlighted as a notable exception, having publicly committed to introducing green clauses across its portfolio of new stores.
The round table identified a lack of information as one of the reasons for the still limited uptake and impact of green leases. First, many participants in the discussion agreed that one of the most basic challenges is a lack of understanding of what such a lease actually is and what it does. The term “green lease” itself was considered potentially off-putting, leading some companies to believe that green leases are fundamentally different from standard leases, when in practice they simply integrate additional clauses into traditional leases.
Second, it was suggested that, even where they are adopted, green leases are usually not seen or used by those involved in energy management but instead remain “in the cupboard”.
Third, the round table highlighted the difficulties in obtaining information on actual green leases that have been agreed and entered into. This may be due to the fact that leases are considered confidential (even though leases of more than seven years are publicly accessible through the Land Registry).
Participants suggested that lawyers operating within current legal practices and culture may further contribute to this situation. Green clauses are typically not seen as a priority in leasehold negotiations, which are still considered largely an adversarial process of allocating cost, risks and liabilities. Anecdotal observations further suggest that lawyers are striking out green clauses.
The round table agreed that there was a need for a shift to a more collaborative approach to drafting as well as increased sharing of data on the uptake of green leases.
In terms of the impact of green leases on energy management, it was suggested that they can provide a useful framework for engagement between landlords and tenants on energy efficiency. However, doubt remains about their impact on day-to-day energy management practices. More research is needed on their relevance at and beyond “key intervention points” in the life of a building and the life of a landlord-tenant relationship.
Where next?
The round table has given us a snapshot of recent developments. The advent of MEES is clearly provoking a response among some sections of the commercial property market, in particular property owners, legal advisers and investors, and significant divestments and/or upgrades of inefficient buildings are expected. Whether green leases can provide additional impetus towards better energy management – and in particular help address the operational performance gap – remains to be seen. At the very least, we hope that continuing the discussion will help raise awareness of energy management issues and promote cooperation between landlords and tenants on energy efficiency as a “win-win” opportunity.
The WICKED project is looking to interview property lawyers and surveyors to gather further views about the use of green leases, and is also planning a workshop on green leases. If you are interested or would like to find out more, please contact Julia Patrick at julia.patrick@ouce.ox.ac.uk
The Westminster Sustainable Business Forum and WICKED
The WSBF is a high-level coalition of key UK businesses, parliamentarians, civil servants and other organisations, which provides a politically neutral environment for knowledge sharing and discussion of sustainability policy. The WSBF publishes authoritative research reports, impacts on government policy through in-depth round table policy discussions; and informs the wider sustainability debate by convening parliamentarians, senior civil servants, business experts and other stakeholders at larger policy events and seminars.
The University of Oxford team is part of a project called “Working with Infrastructure, Creation of Knowledge and Energy Strategy Development” (WICKED), which is investigating energy strategy development in the UK retail sector.
WICKED is a two-year project, funded through the Engineering and Physical Sciences Research Council. It draws on expertise in maths, computing, energy use, organisations, law and engineering to investigate energy strategy development in the retail sector, one of the largest commercial property sectors and a significant part of the UK economy.
In particular, WICKED explores energy management practices and energy efficiency technology adoption across a range of retail organisations – including landlords, retailers, property and energy managers and legal advisers – through interviews, document analysis, data analysis and the testing of smart meter technologies. More information on the project is available at: www.energy.ox.ac.uk/wicked
Julia Patrick is a researcher at the University of Oxford’s Environmental Change Institute, Professor Sue Bright is a professor of land law at the University of Oxford and a judge of the First-tier Tribunal (Property Chamber) and
Claudia Jaksch is a manager at WSBF
