Enforcing net zero targets

As the regulatory framework continues to evolve and tighten, the move towards sustainable leases is an important step in achieving net zero. Sustainable lease provisions are on the increase but there are challenges around enforcement. Leases typically require tenants to comply with statute, but many green lease provisions are not covered by legislation and require co-operation between landlord and tenant.  A recent report from the British Property Federation and JLL identified a lack of access to data, typically energy consumption data, as a major challenge. The BPF put forward a policy recommendation to mandate the sharing of data between property owners and occupiers of large commercial buildings. Without accurate and timely data sharing, it will become increasingly difficult for both landlords and tenants to track against their own and industry-wide sustainability targets. It is difficult to enforce provisions that do not place absolute obligations on tenants but instead encourage more sustainable behaviours. Even where there is an absolute obligation on a tenant (for example, to share its energy usage data) it is unlikely that a landlord would want to forfeit a lease for such a breach. It may also be difficult for a landlord to demonstrate loss arising from breach of a green lease clause.  Again, collaboration between landlords and tenants is crucial here – if the tenant is on board with the landlord’s sustainability goals, such lease provisions are more likely to be agreed. There is, of course, financial benefit for all parties, which could encourage alignment. It has historically been more challenging to introduce green lease provisions on a lease renewal under the Landlord and Tenant Act 1954. However, this was considered last year in Clipper Logistics plc v Scottish Equitable plc (unreported, Sheffield County Court, 7 March 2022) where it was held that requirements on the tenant to preserve the existing EPC rating of the property were reasonable modernisation and could be included in a renewal lease.  As green lease provisions become increasingly common, we are slowly shifting towards an institutionally acceptable sustainable lease. The new 8th edition City of London Law Society Certificate of Title, published in May 2023, includes a statement that tenants will not carry out alterations which adversely affect the EPC rating for the property, and that landlords and tenants will share data relating to the environmental performance of the property. These are small but promising steps towards lenders expecting sustainable lease provisions.  The Financial Conduct Authority is making moves to investigate and tackle greenwashing, which will inevitably mean that contractual arrangements start to be more scrutinised. Green leases will need to be backed up by demonstrable steps or activity to avoid regulatory enforcement for greenwashing going forward. The role of regulation As part of the government’s net zero push, there will be a major overhaul of the non-domestic Part L of the Building Regulations in 2025. In the interim, the Minimum Energy Efficiency Standard is the primary driver for change. The current EPC trajectory, while not yet law, is towards achieving an EPC rating of C in 2027 and B by 2030, and there is discussion around making EPCs mandatory (save where exemptions apply), rather than when a trigger event occurs. While this may not be realistic, particularly in the current economic climate, it has certainly been an excellent catalyst for prompting energy improvement works to buildings. However, we have not yet seen much enforcement of MEES breaches, and it will be interesting to see whether there is an increase in the regulation authorities pursuing landlords currently letting below the requisite EPC rating. Arguably, the reputational risk of having a sub-standard EPC and therefore not being seen to be green (the register is public) may do more to encourage compliance than the imposition of financial penalties. The government’s Roadmap to Sustainable Investing, published in October 2021, proposed introducing sustainability disclosure requirements into UK legislation to encourage firms (including pension funds, asset managers and investment companies) to accurately report on their ESG data and policies, and this could help to drive change. The Law Society has issued guidance to lawyers covering the transition to net zero, and how climate change risks may be relevant to client advice. There are already searches covering climate change risk, which raises the question of the extent to which property lawyers are required to analyse and report on this to clients, or whether this should remain strictly within the remit of surveyors and the client’s own ESG team. Future steps The BPF report also calls for greater engagement between the government and businesses to consider things like data needs and reporting. It is felt that there needs to be greater transparency so that landlords can learn from each other what actions have yielded the best carbon savings. The government response refers to supporting businesses to provide “consistent and comparable data”, which has been welcomed by landlords. The Better Building Partnership launched its green lease toolkit back in 2013 and is expected to update its model lease clauses and guidance later this year. Lawyers are also working collaboratively through the Chancery Lane Project, a movement of legal professionals dedicated to using contracts to fight climate change and examine net zero clauses. These go beyond what we are typically seeing in the market and will help to drive the argument for significant drafting changes to meet more ambitious sustainability targets in the future. Louise Irvine is a senior knowledge development lawyer at Forsters Part 1: Net zero and the push for a greener tomorrow Part 2: Working together towards net zero Image © FredFroese/iStock