It is no secret that the office sector has taken a hit in the last few years, so it’s encouraging to see office take up on the rise again in recent months. Whilst occupiers may have traditionally had two main priorities when deciding where to lease – the size of the space and the cost that comes with it – as the market also shifts into an ESG-led environment, it is unsurprising that the needs of occupiers are shifting with it. Landlords must reassess their understanding of new occupier requirements, and how to manage the implications of these requirements, to move forward with success.

Shifting focus

The focus for occupiers is no longer just about whether the space is big enough to suit their needs, but now includes an ever-expanding list of requirements, including the pressing issue of ESG initiatives. With this proving to be a deal-breaker for many occupiers, landlords need to start taking into consideration the options available to them to improve ESG qualifications on their assets. As well as the EPC, where some tenants are searching for a minimum rating of ‘B’, other considerations may include:

  • Are the materials locally sourced from certified sustainable sources?
  • Is there biophilia in the building?
  • Total elimination of deleterious materials
  • HVAC design in line with BREEAM ENE04
  • On site renewable energy sources
  • Cycle storage and shower facilities
  • Technology to monitor air quality, temperature and CO2 levels
  • Outdoor seating, planting and relaxation space

Whilst these features may have originally been seen as a ‘high cost, low reward’ feature for landlords in years gone past, it is becoming increasingly pressing for landlords to open their eyes to occupier needs and thereby make the refurbishments required to increase a property’s ESG qualifications. Paired with the Government’s new MEES requirements, only allowing for leases to start and continue on a building with an EPC rating ‘B’ or above from 2030, it can only be beneficial for landlords to start making refurbishments sooner rather than later to increase their opportunity for high quality tenants.

Altering the possibility of conflict

The concept of a green lease is not a new one, with the basis being that clauses are included to ensure the property is maintained and used in a sustainable manner. This may include:

  • The requirement to use emission free paint when decorating
  • The requirement to use energy efficient heating and light installations during fit out
  • Prohibiting the tenant from negatively effecting the EPC rating when making alterations or undertaking a fit out

With landlords spending this significant capital expenditure on refurbing to a high standard, the question arises of how they ensure the tenant’s fit out does not later negatively affect the asset. And on the reverse, how do occupiers ensure they are not unduly held to account for any initial expenditure? This conflict of interest has the potential for significant lease end disputes and so should be addressed, and made explicitly clear, when beginning a new lease. Specifically, any alterations should be clearly documented to reduce the possibility of conflict later in the refurbishment process.

A License to Alter document contains written terms and conditions, outlining the alterations which are permitted by the landlord to the leaseholder, and is something we highly recommend obtaining when starting a lease. It is in the landlord’s interest to protect their assets, and undertaking a licence gives the best chance of maintaining high ESG qualifications on the property whilst allowing tenants the freedom to make the space most suitable for their needs.

Discussing the importance of safeguarding assets in line with ESG implications, Director, Daniel Felgate, tells us “It is important to closely consider whether the tenant’s proposals will have an impact, either negatively or positively, on the current EPC rating. It is imperative that clear plans and a specification are agreed, and licence put in place, to protect both landlord and tenant. If needed, a draft EPC/modelling exercise can be undertaken to see how it may impact an existing rating so both parties are comfortable that the terms of the lease aren’t being breached.”

Prioritising the green in green leases

If a lease is truly to be green, then sustainability should be placed with the highest importance throughout the entirety of the lease agreement, including lease end obligations. Whilst going against the grain of typical dilapidations liabilities, landlords and tenants may find that leaving a tenant’s fit out in situ, as long as reasonable and sustainable in nature, will align best with sustainability goals. With this in mind, it is likely we will see a shift to this type of lease agreement in the coming years, with more pressure placed on landlords to have good reason to strip out, rather than it just being the easy option to move forward.

As we progress into a market where ESG considerations are a necessity and not just an ‘added bonus’, we cannot neglect to think about the role occupiers have in their own ESG agenda. It is no longer just energy efficiency which plays a part in an occupiers’ requirements, but an overall move towards leasing a more sustainable and smart building space. Landlords therefore need to balance meeting the needs of their occupiers, with safeguarding assets in line with their own ESG requirements, through the use of license to alter documents and by adapting traditional lease end processes.

Charlie Wildash


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