Traditional lease structures are no longer fit for purpose if the property sector is to achieve decarbonisation and net zero targets. We need to transform the way lease agreements support ESG objectives through the use and management of buildings. Wholesale adoption of a new model of progressive green leases is essential to improve collaboration, increase transparency and deliver shared equity for landlords and tenants.
Systemic change
The leasing system poses one of the greatest challenges on the road to decarbonising buildings. The owner-occupier relationship must shift to a more collaborative partnership, which calls for a new form of contract. Investors increasingly review green lease terms as part of their decision-making process.
Until now, where green leases have been implemented, they have typically been owner-led, compliance-based contracts with boilerplate clauses around energy, water and waste. Obligations are mainly imposed on the occupier to protect a building’s green certification. With legal teams avoiding risks as much as possible and brokers looking to simplify and speed negotiations, they are historically reluctant to agree on green lease terms, often resorting to red-lining such clauses without a full understanding of the implications for ESG objectives.
The next generation of green leases need to go beyond contractual clauses formed at a static lease event, and centre on ongoing collaboration between owners, occupiers and third-party stakeholders throughout the life of the lease.
Transitioning to green leasing 2.0
Ambitious green lease structures will be unique to the parties and building in question but, at a basic level, all leases should include clauses requiring data sharing of energy, water and waste, and maintaining green certification or environmental performance rating to help protect future liquidity.
Addressing the challenge of climate change will require action across multiple fronts. While decarbonisation of the built environment is a primary concern – in part because it is being regulated sooner than other areas – owners and occupiers must also focus on other areas, such as electric vehicle charging, circularity and climate resilience. As companies look to meet all their ESG goals, social value elements are also now making their way into lease negotiations.
Building owners can invest heavily to improve a building’s performance and attain a green certification or other sustainability criteria, but the designed energy performance results will not be achieved if the building is not operated correctly. Occupier operations typically account for the majority of a building’s emissions, making true net zero carbon highly dependent on occupiers committing to using less energy and collaborating with owners on electrification strategies.
As a building’s value is increasingly interwoven with energy performance, collaborative green leases are a clear business opportunity and should form part of productive asset management and risk mitigation strategies. While the leasing process can be complicated, it is a definable moment in time; a process that allows both parties to come together at the outset at a key stage in achieving their net zero commitments.
New ways of working
The opportunity for occupiers and owners to partner on decarbonisation through leases cannot be overstated. In London alone nearly 800 occupiers have signed up to the Science Based Targets initiative and committed to reducing their carbon emissions, a large portion of which is likely from the operation of their real estate. This represents over 37m sq ft of floorspace and will require a huge behavioural shift.
On top of that, the energy crisis and general volatility in the energy market emphasise that green leases should be a priority, not only from a sustainability viewpoint but also from operational stability and cost perspectives.
As many of our occupier clients align their real estate assets and operations with their net zero commitments, they are beginning to integrate ESG as a priority in their site selection criteria. As they do, the lack of net zero buildings, in both ready supply and in the pipeline, will become increasingly evident. We know that 90% of office stock is over 10 years old, and even buildings delivered just five years ago are likely to require major efficiency improvements. The vast majority of existing buildings will need to be retrofitted and these decisions must be thought of and planned.
Education and engagement are vital to enable this behavioural shift, upskilling to inform multi-stakeholder collaboration grounded in a shared set of values, actions and mutual benefits. This new relationship represents an improved business partnership on building management, operation and financing, with new levels of co-operation, cost-sharing and co-investment.
• Read more about a new approach to green leases in JLL’s research report, Green Leasing 2.0
Kirsty Draper is head of sustainability – UK agency at JLL
