Leases that incorporate environmental sustainability or performance requirements and goals.
What is a green lease?
A green lease is any lease that incorporates clauses promoting the sustainable operation, occupation and management of buildings. The purpose of a green lease is to incentivise the parties (most often the tenant but depending on the type of building, also the landlord) to adopt environmentally efficient practices that can reduce the carbon footprint of commercial property.
Why are green leases important?
Traditionally, environmental matters were not a priority when leases were being negotiated between landlords and tenants. Today, however, there are a number of significant factors which make it difficult for leases to be considered in isolation from the environmental element of environmental, social and governance (ESG) criteria.
Addressing the climate emergency
The overarching motivation for entering green leases is to address the climate emergency. The built environment sector is responsible for almost 40% of global greenhouse gas emissions. 11% of these emissions come from embodied carbon, which is emitted during the construction of buildings. The remaining 28% is emitted as a result of day-to-day operations.
Compliance requirement
Many companies have already adopted ESG criteria which seek to tackle this issue, and many individuals are seeking out workplaces that align with their values and priorities on climate action. Green leases will be required to comply with the ESG criteria that have been adopted.
Regulations
The recognition of the impact of the built environment sector on greenhouse gas emissions is now fully appreciated by legislators, both at a national and European Union level. An ever-increasing volume of regulation and policy will continue to put pressure on the sector to decarbonise. For example, if passed, the European Union’s EPB Recast Directive will require all buildings to be “Zero Emission Buildings” on a phased basis from 1 January 2026 until 2050.
Reduction in emissions
In Ireland, the Government’s 2023 Climate Action Plan requires a 51% reduction in national emissions by 2030, and net zero by 2050. Ireland must also meet legally binding, economy-wide carbon budgets and sectoral ceilings. In the context of the Irish commercial property market, the Plan requires a 45% reduction in emissions from commercial and public buildings by 2030, and a 40% reduction from residential buildings. Green clauses are an essential tool for future-proofing leases to address the stringent requirements of these regulations.
Enhancing property value
Further, a green lease is essential in enhancing the value and marketability of a commercial property. Better sustainability credentials will attract an increasing number of tenants, and for a tenant, long-term operating costs will be greatly reduced.
How does a green lease work?
Green leases aim to increase the sustainability of a property by binding either tenants or both parties to obligations that foster stronger environmental performance and energy efficiency. Responsibility can often be shared between both parties, reflecting the principle that the climate crisis should be tackled through cooperation and collective action. Information sharing so that environmental performance can be managed is key to cooperation on this front.
Several sample green lease clauses have been developed by the Chancery Lane Project. This is a global collaboration of lawyers working pro bono to develop new contractual provisions designed to address the climate emergency. These sample clauses are becoming a permanent fixture in commercial leases in Ireland.
Sample clauses provide for various matters, including the following:
Promotion of cooperation between landlords and tenants relating to the environmental performance of buildings, for example data sharing and metering energy use.
Encouragement of improved environmental performance through repair and alteration covenants, rent review assumptions and covenants for the protection of energy and sustainability ratings.
Incorporation of the circular economy and sustainability principles into a service charge regime, landlord’s regulations and landlord’s works.
The effect of the clauses can range from mandatory to aspirational in nature.
What types of properties are suitable for green leases?
Many of the clauses are drafted for use in leases of new office premises in a multi-let building, where the tenants contribute to the maintenance of the building common areas via a service charge regime. Some of the clauses may be suitable for use in leases of other types of premises. It is important to note that green leases are not restricted to new buildings. They can be entered into for existing and protected buildings once they are properly tailored to the relevant type of property.
Ultimately, the sample clauses should be treated as a menu from which landlords and tenants, working with their solicitors and other professional advisors, can select and tailor to make them suitable for their premises and sustainability goals.
What are the benefits of a green lease?
The advantages of green leases will vary for landlords and tenants depending on the circumstances in which they were drafted. However, their broad impact can be distilled as follows.
The benefits for landlords are:
- Enhancement of commercial value: Improved sustainability credentials will attract the increasing number of tenants that focus on meeting their and their stakeholders’ ESG requirements. This creates a competitive market advantage over alternative properties which do not meet the same standards.
- Reputational benefits: Stronger ESG credentials also offer reputational benefits to landlords, which can lead to increased demand for their properties from environmentally conscious companies.
- Improved landlord and tenant relations: The facilitation of a collaborative approach between landlord and tenants in the regular monitoring of environmental performance may help to foster improved relations between the parties.
- Protection of investment: Green leases enable properties to be certified as a green building, such as the LEED or BREEAM standards. This not only protects the investment value of the building but also the asset life cycle, given that green buildings are built with more durable, low-maintenance materials.
- Cheaper financing: Many leading financial institutions and investors are placing sustainability at the core of their corporate strategy. This will impact lending/investing criteria, with reliance being placed on ESG performance.
- Green premium: There is a proven statistical correlation of green buildings with improved rents and reduced vacancies, outgoings and incentives. This increases the probability of “green premium”.
The benefits for tenants are:
- Increased attraction of stakeholders: Green leases boost ESG requirements, contributing to the attraction of more consumers, investors, lenders and employees who increasingly account for sustainability criteria in their decision making. In particular, employees are increasingly seeking out workplaces that align with their values and priorities.
- Enhanced employee satisfaction: Studies have shown that working in a more sustainable, environmentally conscious workplace boosts employee satisfaction and wellbeing, and contributes to higher retention rates.
- Lower operating costs: Green leases may reduce operating costs in the occupation of an energy efficient building for things like electricity, HVAC, and water.
Green clauses are fast becoming a fundamental element of commercial leasing in Ireland. We have outlined the importance of green leases to both landlords and tenants in the face of increasing regulation and a deepening climate crisis, and the numerous benefits of same.
The Irish property market expects buildings to be sustainably constructed and operated as we move into the future. Green clauses are designed to accelerate this transition and it is expected that they will evolve to reflect the changes in law and practice as they occur over time.
Given that the clauses are templates only, and in light of the ever-changing and complex ESG landscape, it is prudent to take legal and professional advice to ensure that the provisions are suitable for your organisation.
We are pleased to have been involved with The Chancery Lane Project to publish a suite of green lease clauses for use in commercial leases in Ireland.
For more information on green leases and any other queries about commercial leases, please contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.