In the second of a three-part series on net zero strategy, Laura Haworth and Louise Irvine look at how landlords and tenants should collaborate on improving energy efficiency and reducing carbon emissions.
With a government-led national push towards net zero by 2050, there is increasing scrutiny on the real estate industry to take steps to reduce its own carbon emissions within this time frame, if not sooner.
One of the key points to address is where the responsibility lies and who will pay for the transition. The industry is coming to realise that the burden is shared, and that only through collaboration can the sector, as a whole, shift forwards and deliver results.
Sharing data
A key opportunity for landlords and tenants, across both the commercial and residential sectors, is to boost data sharing, a crucial factor in meeting net zero goals.
This helps landlords understand the energy demands of their tenants and allows both parties to consider what improvements would make the property more efficient and, post-implementation, the measures that are making a meaningful impact and those that are not. If tenants consent, it is often more efficient for landlords to obtain the data directly from energy suppliers or by using smart meters, rather than relying on tenants to provide the information.
The evolution of green leases
On 1 April 2023, new requirements came into force for all let commercial properties to have an EPC rating of E or above, otherwise those property owners face fines pursuant to the Minimum Energy Efficiency Standard Regulations. But this is the tip of the iceberg in terms of green lease drafting.
Traditionally, we saw what we term “light green” clauses in leases, focusing on an obligation on the tenant not to adversely affect the EPC rating of the property. The trend now is towards “dark green” lease clauses, which include provisions such as the sharing of information regarding energy use and waste management, landlord rights of entry to carry out energy efficiency works and more general provisions for the landlord and tenant to co-operate with each other to improve energy efficiency. Dark green lease clauses may even impose a requirement for tenants, where practicable, to avoid using gas and for both landlord and tenant to procure their energy supplies from renewable energy providers.
These green clauses are generally seen by landlords as a back-up. It is preferable that there is an ongoing open dialogue between landlords and their tenants, with a shared objective to move closer to net zero. The provisions in the lease are something to point to if a tenant becomes obstructive.
There is an issue as to how enforceable many green lease clauses are. Landlords are not likely to forfeit a lease if a tenant has not provided information regarding its energy use or used recycled materials. So collaboration is key for green lease clauses to work. Introducing them at heads of terms stage often makes tenants more accepting of these provisions.
In the not-too-distant past, tenants would simply strike out green clauses in leases. However, tenants seem to be becoming much more accepting of them as they need to demonstrate their own green credentials as well. Most tenants will now accept at least an obligation not to carry out works that would make a property sub-standard for the purposes of MEES, as well as provisions for sharing data on energy use. Some larger tenants are even presenting landlords with their own set of green lease clauses that align with their corporate sustainability goals.
We are also seeing landlords future-proofing their buildings by having rights in leases to install solar panels. This has an energy cost saving for tenants, as well as helping towards the landlord’s sustainability goals through the use of renewable energy.
Fit-out for the future
Traditionally, a landlord will carry out a “category A” fit-out, finishing a space to a basic level. The occupier will then move in, rip out at least some of the landlord’s fit-out (for example, in order to move cables and other service media to their desired locations) and then install their own. Each time there is a change of occupier, there can be another substantial re-fit.
While there is generally a requirement for the parties to use, where possible, materials that have been recycled and/or are recyclable, often with an obligation to carry out the works with a view to achieving the landlord’s net zero target, parties are now increasingly realising the environmental impact of these frequent re-fits. There is a focus in the industry towards reducing the environmental impact of changing occupiers. There are calls for more flexible spaces so that minimal works are required for each change of use.
If possible, it is useful to get the tenant involved as early as possible and to work together so that there is only one joint fit-out. However, this involves significant trust between the parties and a willingness to compromise to meet the needs of both.
Another option is for landlords to retain much greater control over tenants’ works than they perhaps have done previously. Rather than just approving drawings and letting the tenant get on with it, landlords will need to ensure that the actual works meet all of the environmental targets promised in the design stage.
Tech longevity
There is a focus on investment in net zero technologies, so it is expected that we will see quite a rapid development of smart tech to assist with energy efficiency. Landlords might find that fairly new systems they have installed become outdated quite quickly. The key is going to be ensuring that individual elements of smart systems can be updated without a total overhaul. This will mean making sure that systems do not use specialist cabling or that the chosen system is not limited by only a handful of people being able to do works to it.
By working collaboratively, landlords and tenants can move towards a cleaner and greener future. But a willingness to be open and transparent is essential to decarbonising our built environment and reducing operational energy. It is in the interests of both landlord and tenants.
See also: Net zero and the push for a greener tomorrow
Laura Haworth is a senior associate and Louise Irvine is a senior knowledge development lawyer at Forsters
