Leasing by example

Energy efficiency is a concept the property market is going to have to embrace wholeheartedly in the near future. Given the climate change issues we hear about daily, and the spectre of fuel poverty that is becoming a reality in Britain today, landlords and tenants need to look seriously at how they use available resources and how costs can be minimised.

The UK Government’s renewable energy strategy1 acknowledges that making Britain’s power supply more green will push up energy bills and increase fuel poverty. As a result, viewpoints are starting to shift regarding energy use and efficiency in buildings, and how the traditional legal framework can be altered to reflect this to the advantage of both landlords and tenants. Energy performance certificates are set to focus minds across the domestic and commercial property arena on energy efficiency, and what that means in terms of rental values, property portfolios and investment in green technology. Awareness of energy efficiency will become far more prominent as a result, and another way of realising this is through the medium of “green” leases.

The Real Property Association of Canada (REALpac) has issued a model Green Office Lease2, and it is worth considering its implications.

The model lease

The “green” parts are in a schedule to the lease, as an “environmental management plan”. They are stated to be “landlord-centric”, but are easily adapted to suit tenants, and also to operate as a “shared responsibility” model. It is a lease for a single office building, but the green clauses can be adapted for retail and institutional property, as required. The schedule sets out these objectives:

• a comfortable, productive and healthy indoor environment
• reduced energy use and reduced production of greenhouse gases
• reduced use of potable water and use of recycled water
• effective diversion of waste from landfill and incineration, and the recycling of tenant waste
• using cleaning products certified in accordance with suitable environmental standards
• alternate transportation options for people using the building avoiding high volatile organic compound (“VOC”) materials, furniture and improvements within the building and individual tenant premises
• electricity use, natural gas consumption and water consumption levels to average no more than X kilowatt hours, cubic metres and litres per square foot of rentable area of the building per year
• a waste diversion rate not less than X% per year indoor versus outdoor CO2 levels of no more than X parts per million measured to relevant standards.

Any carbon offsets arising from the operation of the building belong to the landlord, and there is provision for the deemed amendment of the objectives if more stringent regulatory targets are imposed at any stage.

Implementation of the plan includes the following:

• the landlord is able at any time on reasonable notice to carry out greenhouse gas production monitoring and testing
• tenant’s works must comply with the tenant construction manual, which sets out rules, specifications and procedures for the design and construction of improvements and alterations in and to the property
• all paints, sealants and adhesives and all cleaning products must comply with a suitable environmental standard, and the landlord may test for VOCs
• furniture, materials, fixtures, supplies and equipment should meet the tenant procurement guidelines supplied by the landlord
• any cleaning contracts must require the contractor to comply with the relevant parts of the plan, especially in relation to specialised green facilities, such as waterless urinals, which have particular cleaning requirements
• the landlord will purge the air in the building while the tenant is moving in, to minimise offgassing of glues and dyes in wallpaper, carpets and furniture, at the tenant’s cost (the evaporation of volatile chemicals in non-metallic materials at normal atmospheric pressure means that building materials can release chemicals into the air for years after the products are initially installed)
• electricity smart meters will be installed at the tenant’s expense
• the tenant shall take reasonable steps to minimise electrical consumption (i.e. reducing lighting where unnecessary and using energy saving equipment)
• the landlord is entitled to use low carbon output energy sources
• the landlord can also install onsite generation capacity and the tenant pays a proportionate amount of the incremental cost of installation
• the tenant can ask for its electricity to come from renewable energy sources, at its own cost and expense
• the landlord’s choice of building rating system will be the benchmark
• the landlord shall operate the common areas and facilities in accordance with the objectives
• water meters will be installed at the tenant’s expense
• the use of treated recycled water where possible, and the collection, treatment and re-use of rainwater and wastewater by the landlord
• the use of water-saving devices
• use of recycled materials
• in improvements and alterations, and recycled furniture, fixtures and equipment where compliant
• where the tenant demolishes existing improvements or alterations, either the tenant or its contractor to recycle as much of the waste created as possible, to minimise landfill. The landlord is entitled to monitor and measure the amount of waste leaving the site
• use of locally sourced materials where possible for improvements or alterations.

The schedule provides for landlord and tenant to co-operate in determining compliance with the objectives and to refine them if required. The parties shall meet at least once a year to discuss progress, and there are mutual covenants relating to using reasonable commercial efforts to achieve the objectives, constructively consulting on any enhancements that may achieve the objectives and to consider undertaking any such enhancements, and on any issues, events or circumstances likely to detract from achieving the objectives.

Issues for the UK

1. Landlords and tenants in the UK are averse to spending more money than is seen as strictly necessary to obtain the best deal (however defined). This is not a view that sits particularly well with climate change issues and the concept of green leases, where build and fit-out costs are commensurately higher due to the requirement to use certain products and behave in certain ways that are not comfortable for the traditional landlord and tenant.

2. The building stock in the UK has issues that are not so prevalent in Canada, mainly the large quantities of old, and in many cases listed, buildings. The UK has not yet really dealt with the treatment of old stock in terms of the new environmental regulations, and how far they can be made to comply in the first place.

3. There is a high degree of inertia in the property industry, and in some cases an unwillingness to take on board the implications for the market of the behavioural and practical changes being forced on parties as a result of an increasingly well-informed and vocal customer base. Corporate social responsibility (CSR) has become a highly important factor in many leading customers’, developers’ and investors’ businesses, influencing brand, share price and reputation, as well as incorporating the business review requirements of the Companies Act 2006, s 172 – any review must include information about environmental matters (including the impact of the company’s business on the environment) and information about social community issues. The Centre for Research in the Built Environment (CRiBE) has produced a good practice guide, “Incorporating Environmental Best Practice into Commercial Tenant Lease Arrangements”, which has useful points for parties to consider when addressing environmental concerns in their contracts.

4. It will be interesting to see how Canadian tenants manage to persuade their cleaning contractors and similar suppliers to comply with the provisions of the green lease, in terms of products used and behaviours on site, and whether the environmental management plan flows down into third party contracts. In the UK, it is difficult to see how this would work on a non-mandatory basis, as unless there is a statutory requirement for third parties to comply with the relevant terms of green leases, it would be unlikely to be effective.

5. Constructive consultation on ways to achieve the environmental objectives in the schedule is not something that is familiar to landlords and tenants in the UK, nor has dealing with demolition waste in an environmentally-friendly manner concerned parties here too much in the past. Other unfamiliar concepts such as using treated and recycled water, reducing the levels of CO2 and energy consumption in the property, and having to use environmentally certified products, are likely to cause uneasiness to British landlords and tenants. The Code for Sustainable Homes has at least addressed some of the issues regarding domestic emissions, but in relation to non-domestic stock, there would appear to be no consistent standard.

6. Canada has the “Leadership in Energy and Environmental Design Commercial Interiors” standard, but energy performance certificates and display energy certificates are the only consistent way to review the energy usage in buildings in Britain to date.

7. It is debatable whether the UK has sufficient investment in the type of innovative products and services, and the quality standards, that would make the green lease workable here. This may change with the lifting of barriers to innovation in the renewable energy market, and the incentives envisaged in the renewable energy strategy, and also the new Carbon Trust standard allowing organisations to demonstrate their commitment to and achievement of carbon emissions reductions.

8. New-build houses in the UK rarely reach more than level 4 of the code in terms of energy saving and sustainability, whereas the Scandinavians and the Germans are far beyond this, so it is difficult to see how the UK would have the resources, and in some cases the will, to make the changes necessary to enable green leases to work.

How long?

The REALpac green lease is a further development on the road to a environmentally-aware property market, and the fact that this has been published is evidence that parties are starting to ask for such products. It remains to be seen how soon a model green lease will appear in Britain but, in light of Hermes’ adoption of green lease terms in their portfolio this year, and now the government’s renewable energy strategy, it should not be too long a wait.

Kirsty Nicholson is a partner in Real Estate at HBJ Gateley Wareing

1.  www.berr.gov.uk/energy/sources/ renewables/strategy/page43356.html
2. National Standard Green Office Lease for Single-Building Projects – 1.01 – 2008, REALpac, 1 June 2008www.realpac.ca/s_223.asp