Embracing social value in leases

A lease is usually understood to be a contract giving a tenant the legal right to occupy a property, in return for the payment of rent, subject to various conditions of that occupation. However, leases are capable of delivering more. This article explores how a lease can be used to implement a real estate owner’s investment strategy to deliver measurable social value. Why social value? The incorporation of ESG into investment decisions has been one of the most significant business disrupters in recent years and is not going away. Social value is not new, incorporating long-utilised planning and public procurement standards (think “placemaking” and “social value” under the Public Services (Social Value) Act 2012). However, it has been overshadowed by pressing environmental – “E” – factors such as climate change. It is therefore due a revival. There are three main drivers for property owners to insert “S” language into their leases: Regulatory environment Property is local but real estate is a global business. There are various factors compelling investors to consider social value, including the publication of the Financial Conduct Authority’s Sustainability Disclosure Requirements in November 2023, the provisional agreement in December 2023 on the principles to underpin the Corporate Sustainability Due Diligence Directive by the EU parliament and council, and the galobal trend towards greater accountability of business activities. The issues high on their list include: (a) human rights, employment conditions, and the protection of the vulnerable throughout the value chain; (b) health and safety, social wellbeing for staff and the wider community; and (c) the location of direct and indirect business operations, standing against bribery, corruption, forced labour and other harmful practices. Reputation Property owners have always been concerned to avoid being tarnished by association with any undesirable characteristics of, or behaviour by, a tenant. This is more acute than ever now due to the UK’s increasingly politicised workforce, socially aware consumers, and class actions from overseas making headlines. Litigation risk As ESG has become more prominent in investor questionnaires, property owners have needed to vocalise their ESG strategy across their business. As with greenwashing, social value promises risk litigation if they are not substantiated within investment, governance and asset management strategies. How to choose the right social value objectives The most commonly encountered objectives are those that tackle inequalities in employment, promote equal work-based opportunities and wellbeing/good health, and/or those that aim to deliver something back to the local community. Many property owners will have existing HR policies incorporating “S” factors. As regards a wider “S” strategy, there are emerging standards to define social value in a way that can be applied to business, property and projects, such as the UKGBC Social Value on Built Environment Projects, the Social Value Portal, and the Better Buildings Partnership checklist, to name a few. The challenges There are several key challenges that property owners wishing to implement “S” drafting are likely to experience: The tenant’s response Tenants might wish to incorporate their own ESG policies, and they might want to see reciprocal commitments from the landlord. Market norms At present, there are no settled market standards. In an era of increasing standardisation this makes ESG drafting an outlier, and time spent negotiating ESG clauses can, at best, increase legal costs and, at worst, any unusual terms could lead to a reduced rental value and/or have a negative impact on rent review. Reporting outcomes The “ownership” of successful “S” outcomes can be a thorny issue between the landlord and tenant, and care needs to be taken that any successes do not present as exploitative of their beneficiaries. Proactive asset management Measuring outcomes is one of the key elements of demonstrating social value. It is crucial that the lease contains robust obligations on the tenant to evidence compliance, and that the ongoing collaboration this process will involve is reflected in property management agreements. Enforcement These provisions are fairly new to the sector with little established practice in trying to enforce them, but in general terms it can be difficult for landlords to enforce lease provisions if they cannot point to the loss caused by tenant default. Value chains While it can be relatively easy for a tenant to covenant that it will not breach “S” objectives relating to, for example, forced labour, it will be harder for it to comply with (and for the landlord to monitor compliance with) covenants relating to the tenant’s wider value chain such as the manufacture of the products they purchase in the course of their business or the services that they commission. Final thoughts Social factors can be inexpensive yet meaningful ways for property owners and investors to add value to the lives of the people who occupy their buildings and those who live and work in its environs. While there are currently no standard clauses that can be easily cut and pasted into a lease, consensus is growing as to what the main ingredients should be, and measurement tools are being developed to help ensure that “S” goals are met. Example lease clauses Clause Social value Drafting General principles HR policies, good business practice, compliance with laws The Tenant shall comply with all statutes and other legal requirements whatsoever affecting (i) the Premises or the Tenant’s use of them and (ii) the operation of its business activities. The Tenant shall not do anything which may damage the Landlord’s reputation or whereby the Landlord may become liable to pay any damages, compensation, costs, charges, expenses or penalty under any statute. As a responsible tenant, the Tenant: shall adhere to the ten Principles of the United Nations Global Compact; is committed to being an inclusive employer in respect of all staff employed at the premises; and shall maintain appropriate policies regarding the training and retention of staff, their wellbeing in the workplace and anti-discrimination procedures. The Tenant shall pay attention to the impact it, its supply chain and its business partners have on human rights and society (“social values”), and will have regard to these in the operation and management of its business and in respect of the Property. The Tenant shall reply annually to a social value survey conducted by or on behalf of the Landlord. Dealing with the Lease Change of occupier Before assigning the Lease or subletting the Premises or on any Change of Control, the Tenant must serve a notice on the Landlord offering to surrender the Lease. Fit-out and works to the Premises Value chain considerations Building contract terms, selection of workforce, selection of materials While carrying out any recruitment activities or conducting any works at or from the Premises, the Tenant shall: ensure that the wellbeing of its employees, staff and contractors is considered; where possible, hire locally and provide training schemes and/or work experience placements for local applicants; and specify materials that are sustainably sourced and not produced in a way that is likely to have used forced or slave labour. The Tenant shall procure that in respect of any works at or from the premises, its contractor shall: pay attention to the impact it, its supply chain and its business partners have on social values and will have regard to these and other business ethics issues in the operation and management of its business and in respect of the project; and incorporate the Landlord’s social value and ESG policies into its contractual documentation. Use of the Estate Placemaking and engagement on local projects The Tenant intends to work with the Landlord to promote community and staff engagement, education and employment on [the Estate] (“social objectives”) and shall: use reasonable endeavours to attend [Estate] events, enlivenment forums and sustainability forums of which it has been notified; use reasonable endeavours to promote any offers and promotions provided by the Landlord at the [Estate] in respect of social objectives; offer training and education programmes for local children and young people, including providing internships and work experience programmes; encourage employees to use local businesses/amenities; and promote walking to work, where possible, by for example supplying cycle facilities. Alignment to owner’s investment strategy over time Use of regulations The Tenant will comply with the Landlord’s social value and ESG Regulations in connection with the use and occupation of the Premises [and/or the Estate]. Sarah Walker is a partner and Sarah Quy is a knowledge counsel at Travers Smith LLP