A “green lease”, that is one that contains provisions to maintain or improve the environmental performance of the premises, is hopefully now the norm on lettings of all commercial property.
Pale green, non-contractually binding memoranda of understanding have evolved into mid-green lease drafting as standard. Typical commitments include no alterations by the tenant that reduce energy efficiency, the sharing of utilities data between landlord and tenant, and perhaps a tenants’ forum to review and implement recommendations from an energy audit of a multi-let building.
As climate concerns grow, we are now seeing lease provisions that are darker green in colour, containing bold, strong green commitments on the part of both landlord and tenant to work towards a net-zero carbon target for a building, and to reach and maintain the very highest environmental ratings. We have even seen tenants compelled to accept commitments to decrease energy usage of premises year-on-year, on pain of penalty, with the collected funds donated by the landlord to a good cause. Very dark green indeed.
Green is not the only colour
But more forward-thinking landlords and tenants are now evolving their leases from “black and white with hints of mid-green” to multi-coloured “rainbow leases” as corporate, customer and shareholder attention broadens to wider matters of ESG. Leases are among the longest, most significant, most costly supply contracts that an organisation enters into. If ESG considerations quite rightly colour all of a corporate’s business dealings, then why should those same ESG issues not be addressed when negotiating letting documents?
With ESG covering such a broad range of concepts, the E is more familiar to define, to draft and to agree. Working together as landlord and tenant to reduce operational carbon emissions, prevent pollution and limit waste may all be related to the building and the demised premises themselves.
When looking to the S and the G, both social and governance considerations are more fluid and go directly to how the landlord or tenant run their respective businesses as a whole.
Both might worry that their successors will have differing priorities and that committing to “doing the right thing” within a lease document might limit the pool of willing buyers. But the trend is there, starting with an ombré of E fading into S, with commitments to biodiversity and the careful stewardship of shared grounds, and to fresher air – both within the building, to promote the wellbeing of those who work within, and outside the building, to benefit society through such things as proactive delivery traffic management and coordinated waste and recycling collection across all tenants.
Will a landlord commit to run a green travel plan, and will a tenant agree to pay its share – a bus from office park to local railway station, bike-sharing schemes with all the associated end-of-trip facilities, and plenty of EV charging points in the centre’s car park for commuters and customers?
Community benefits
Recognising that particularly the E and the S cannot be achieved by solo efforts, we are now seeing landlords volunteer to commit to covenants beyond just quiet enjoyment, for the good of the communities within which their properties are sited. Placemaking can only be achieved through a landlord/tenant team effort and a combination of promises – for example, to join in with and contribute to community events, to set aside a quota of new retail space for niche retailers, or to let the building’s café to an independent operator providing ethically sourced coffee. Tenants looking to achieve substance to match their ESG promises would not want to be seen to be sharing the use of a canteen that is still handing out single-use plastic or occupying part of a building where the facilities staff are paid less than the Living Wage.
Reputation on the line
To date, a typical commercial lease has rarely included a covenant by the landlord to comply with statute, but inevitably includes such a covenant in favour of the landlord from the tenant.
If you were ever doubtful that a commercial lease is the right place for mutual ESG commitments, take a moment to reflect. Good intentions are all very well, but without contractual provisions to enforce – within the lease and lasting for its full term – could your business survive the scandal of being associated with a long-term counterparty who is, say, involved in corruption or an unmeritorious industry? For many landlords and tenants, there is a hard black line of drafting designed to prevent the assignment of both reversion and lease to those falling within the definition of “unacceptable assignees”.
ESG considerations are no longer just “nice to have” – customers, clients and, increasingly, staff will all want to see proof of achievement. As a blue-chip landlord that has set ambitious, public ESG targets, how can you achieve those if your tenant is not committed to co-operating? If you are a tenant whose careful governance analyses the supply chains of source materials for compliance with ABC or modern slavery laws, perhaps you should carry that through to the contract with the organisation that supplies your space.
We are already seeing investors pulling out of or reducing their involvement in certain sectors – it is possible that going forward landlords and tenants will need to consider these same issues. Perhaps over the next five years or so it will become the new norm to include lease drafting of many colours, not just green, to achieve ESG targets across the spectrum to the mutual benefit of both landlord and tenant. Every commercial lease is an opportunity to further the ESG aims of an organisation, whether landlord or tenant, and, given the length of a lease term, if that opportunity isn’t taken then it may be lost for several years.
Caroline Andresier is legal director at Eversheds Sutherland
