The push to Net Zero, and the ever-growing emphasis on businesses to provide ESG credentials mean that it’s not just developers of new buildings who need to think sustainably – there are increasing requirements for landlords and tenants to act too.
The built environment industry is a major contributor to carbon emissions and is estimated to be responsible for 40% of CO2 emissions around the world each year. The industry therefore has a hugely important part to play in reducing global emissions.
The UK Government has publicised its commitment to achieve Net Zero carbon dioxide (CO2) emissions by 2050. The key strategy publications are (i) the Net Zero Strategy and (ii) Powering Up Britain: The Net Zero Growth Plan. The new Labour Government has outlined plans for the UK to become a clean energy ‘superpower’ by 2030 accelerating to net zero. There are obvious barriers to achieving this which the industry has outlined, in particular grid connection efficiencies.
It is now widely understood that developers of new commercial and residential schemes must meet stringent targets for sustainability, by making their developments as energy efficient as possible, and by offsetting any environmental impact of their developments through mitigation schemes such as BNG or nutrient neutrality credits.
For example, in 2019 Bath and North East Somerset (BANES) became the first Council in England to adopt a ground-breaking planning strategy obliging all new housing to be net zero and 100% self-sufficient by 2030, and for major commercial developments to have net zero operational carbon standards. Other authorities followed suit, with Wiltshire following suit in 2022, and new policies will also limit the carbon output during the construction phase upfront.
However, the Net Zero aspirations will not be met by the mitigation of the effects of new developments alone. Increasingly, eyes are upon what can be done with existing buildings to reduce their effect on the environment in decades to come.
The problem with existing buildings
The UK has some of the oldest housing and commercial stock in the world and it is believed that 80% of the buildings that will exist by the time the Net Zero deadline comes around in 2050 are already built today.
The problem is that old buildings are often very energy inefficient – industry experts estimate that 28% of commercial properties currently fall below an Energy Performance Certificate (EPC) rating of C, which will be the minimum requirement for commercial leases from 2027 under the Minimum Energy Efficiency Standards legislation.
This will make it made it unlawful from 2027 for a landlord to let or to continue to let a commercial property with an EPC rating below a ‘C’, unless an exemption applies, and landlords of those properties may face fines if works are not done to improve the rating to a C or better.
Staged rises are also due in 2030 whereby commercial rented properties will require a minimum EPC rating of B or higher. Landlords (and their lenders) therefore have just over three years to act to achieve a ‘C’ rating and protect both the rental and disposal asset value.
This will require an ongoing investment in retrofitting existing buildings to achieve improved EPC standards, and that comes with financial pressures, especially in a construction market struck by high material costs, supply chain issues and labour shortages. However, it is likely to be money well spent given the direct impact on future leasing and disposal valuations.
Some buildings will be beyond saving, but in most cases, it will be more energy efficient to retrofit existing buildings than it is to demolish them and build in their place. This is especially true when factoring in the concept of embodied carbon, which measures the greenhouse gas emissions that arose from the manufacturing, transportation, installation and maintenance of the existing building’s materials, along with the environmental cost of disposing of those materials after demolition. Ultimately the whole development lifecycle from conception to completion will be pushed to limit carbon outputs, and accountability and data reporting requirements are increasing.
The rise of the green lease
Against this background, and with the wider need for corporate entities to have a full Environmental, Social and Governance (ESG) policy, landlords have their work cut out.
This results in the need to future-fit all buildings to meet the targets – so developers and landlords need a strategy of net zero interventions for all buildings, and especially those that are likely to still be in use in 50 years’ time.
One way for landlords to meet their obligations is to share responsibility for energy efficiency with tenants – after all, it is the tenant-occupied areas which will produce the majority of CO2 output in most properties.
So-called ‘green leases’ can be an effective tool for achieving this, as they include clauses and obligations which place responsibility on the tenant to help monitor and reduce energy consumption, increase energy efficiency, and reduce maintenance and operating costs. Longer term, they can potentially increase the future rental value of the property, for example by improving waste efficiency, water management and air quality, and the use of renewable energy.
Green leases are helpful not just for their benefit in reaching environmental targets – they also make sound commercial sense for landlords. Greener buildings often command premium rental values as tenants seek to meet their own ESG pledges and obligations, leading to potential long-term income improvement for landlords.
It’s important to remember that from a legal and practical perspective, green leases do not have to be for new buildings, nor are they, currently anyway, a standard clause or document, more a group of interacting obligations aimed at requiring the parties to coordinate efforts to make efficiencies and to ensure that any works carried out to a building do not impair the energy efficiency, and those clauses will be the result of negotiations between the parties in each case.
Many landlords are taking a staged approach – preparing supplemental documents to add minor green obligations to existing buildings/tenancies with an eye on ‘deep retrofitting’ the building once the whole building becomes vacant.
Thrings’ Clean Energy team includes specialist lawyers from across the firm’s many disciplines, and advises commercial developers, farmers and landowners on the legal aspects of clean energy, environment and biodiversity – including the drafting of green leases and supplementary documents, providing planning, construction, real estate and corporate advice for a holistic approach to a sustainable project. We are here to support you on your pathway to Net Zero. Find out more and contact us here.
