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The commercial property sector now finds itself at the centre of environmental policy changes which will have implications on landlords and tenants that are only just beginning to be fully appreciated. At the forefront of this is the Scottish Governments target to meet net zero carbon emissions by 2045.

Buildings are responsible for around 40% of the UK’s carbon emissions, with business properties accounting for around half of that. The Scottish Government figures indicate there are approximately 200,000 non-domestic buildings in Scotland ranging from offices, warehouses and retail stores to hotels. So, with policies starting to focus the minds of owners and occupiers, we need to start thinking about how commercial leases can help facilitate the sustainability agenda.

Currently, commercial leases put significant barriers between landlords and tenants and their ability to implement improvements to reduce carbon usage in buildings. For example, a standard lease will often require a tenant to obtain permission from the landlord for any alterations. So, if a tenant wanted to remove a gas boiler and install a more energy efficient heating system, they may need to seek approval, for which there is no guarantee the landlord would agree. Secondly, tenants also have their end of term dilapidations obligations to consider. Therefore, even if a landlord does agree to the alterations these may be subject to an obligation requiring the tenant to remove and reinstate the premises to the original configuration at the end of the term. This brings with it significant financial implications which may prove prohibitive.

On the landlord side, owners need to ensure that the alterations being undertaken by tenants do not adversely affect the environmental performance of the building. They also need greater power to improve the environmental performance of their buildings given that when it comes to multi-tenanted buildings, tenants are likely to have little scope to make significant improvements themselves. At present, standard commercial leases may restrict the landlord’s ability to do this, particularly where the works are likely to cause disruption to services.

To push forward the sustainability agenda, we need to see much greater collaboration between landlords and tenants. This will require a fundamental shift in culture and when it comes to matters such as reinstatement, Landlord’s may have to accept they need to consider the wider environmental issues and not simply attempt to maximise their dilapidations claims. The environmental impact of enforcing a covenant to remove alterations must be more carefully considered, especially where repair is a viable option.

This will require a significant change in the way leases are drafted which is likely to involve a move towards the green lease model. Green leases include clauses which provide for improvements in the environmental performance of a building by both landlords and tenants. This is achieved by setting out the parties’ responsibilities in respect of various issues from energy management and monitoring, to the works which are permitted and the way reinstatement is dealt with at the end of the tenant’s term.

Balancing the requirements of the parties involved is not easy. For example, when it comes to reinstatement matters, whilst it may be reasonable for a tenant to request the landlord waives its right to reinstatement if the alterations improve the environmental performance of the building it is still very difficult to foresee whether these alterations would still be of benefit a number of years down the line.

The Better Building Partnership have set out a Green Lease Toolkit which includes best practice recommendations along with model lease clauses which provide a framework to support greater engagement and collaboration. Whilst the green lease concept has been around for some time, with the legislative environment tightening, take up will surely increase.

It’s likely that 2019 will be remembered for the increasing public awareness and focus on environmental issues, and given the increasing urgency to reach net zero carbon targets, it must surely be time for landlords and tenants to start recognising that greater engagement and collaboration are required in order to reach this goal.

At Hollis we are experienced in providing strategic leasehold advice to both landlords and tenants. As market leaders in dilapidations and offering an expert in-house environmental team we understand the many different practical ways to help you mitigate risk and add value. So whether you’re an owner or an occupier, we can help you get more from your real estate by providing a joined-up and strategic approach.

As featured in November / December issue of Business Comment Magazine – page 32.

Clare Holyoake
Associate
Edinburgh
T: +44 131 240 2805
E: clare.holyoake@hollisglobal.com