Overcoming lease shackles to go green

There is growing pressure on the commercial property sector to significantly reduce its collective carbon footprint. Be it from an occupation, management or construction perspective, all sectors are being pushed in order to meet government targets of 30 percent reduction in carbon outputs.

Whilst huge strides are being made, there is one overriding element that stands in the way of true progress and that is the traditional commercial property lease that almost all businesses are tied in to, whether as landlords or tenants.
The standard Full Repairing and Insuring (FRI) lease that is common place in the UK has had little, if any, updating over the last 100 years, making it feudal and archaic. The nature of these agreements actually work against allowing occupiers or owners to take sustainability measures by carrying out improvements to buildings.

Whilst in principal the format of an FRI lease is commercially sound, they have changed very little when the demands on business, especially with regards to climate change, has. This has made a number of the terms that have previously been taken for granted, outdated and in need of modifying.

Interestingly, two of the countries that are leading the way in terms of developing sustainability in buildings are Australia and Canada. Both of these countries originally adopted the English FRI lease model, but have since introduced government backed ‘green leases’. If the UK is to stand any chance of meeting the 2020 target of reducing carbon emissions from existing building stock, then we need to follow the example as set by both these countries.

Obstructing sustainability
One of the biggest problems with the standard FRI lease is that it generally removes a landlord’s right to carry out major improvements on a building, whilst at the same time punishing a tenant who takes a similar initiative. This leaves both parties legally and financially vulnerable should they wish to adapt their built environment to a higher green standard.

A typical commercial property lease will include a yielding up clause of some kind, relating to how a tenant must hand over a property to the landlord at the end of the term of the lease or at a lease break. The most commonly used covenant requires the tenant to reinstate the property to the configuration, layout and condition in which it was originally found. This obliges them to remove any alterations made during their occupation, at their own expense. This would include the removal of any significant energy saving upgrades and the stripping out of partitions.

A ‘green lease’ on the other hand, includes the mechanism to allow a landlord or tenant to make any agreed sustainable improvements by removing the barriers and achieving financial incentives for both parties. It can also recognise the unsustainable nature of stripping out and fit-outs to encourage reuse of partitions and other adjustments from tenant to tenant.

Creating incentives
The biggest incentive for tenants to become more sustainable is to save money on energy bills. Major changes such as installing alternative energy sources are unlikely to start paying for themselves during a lease term.

The nature of business and property occupation today means that it is unlikely that a tenant will be in place for long enough to make all their money back, so the lease needs to acknowledge this by sharing the initial financial outlay with the landlord, who will be set to benefit from added value to the property in both resale and rent increases for future tenants.

With new eco-technology being constantly developed, it is impossible to predict what will be available in even five to ten years’ time. A lease needs to take this in to consideration and enable parties to adapt to future developments.

Removing conflict
Traditional leases tend to breed conflict, with landlords having the power to refuse to allow tenants to make any alterations to a building. For a sustainable approach to property management and occupation to really succeed there needs to be collaboration between all parties throughout the term of a lease.

One previous method for ensuring that improvements could be made to meet regulations saw the Disability Discrimination Act 2005 include a clause that stops landlords having the power to refuse a tenant’s application to make improvements to increase accessibility to a building. The problem with this scenario is that it still results in a conflict situation due to its combative nature. A green lease facilitates collaboration, enabling an amicable and pragmatic approach to meeting sustainable regulations such as the government’s Carbon Reduction Commitment scheme.

What can be done now
Whilst ‘green leases’ are still in their infancy and with their implementation only likely to come at the lease negotiation stage, there are still measures that can be taken to adapt existing FRI leases.

The wording of a lease, once it has been signed, is set for the duration of the term. However, there is nothing to prevent the landlord and tenant removing the shackles by drawing up side agreements, known as a Memorandum of Understanding, to address sustainability opportunities.

Although not legally binding – unless expressly stated to be so – a Memorandum of Understanding enables parties to agree to work together in good faith through the mechanism of a Building Management Committee, to achieve and implement specifically set out environmental objectives. For example, these could include:
- excluding reinstatement requirements on alterations designed to improve the environmental performance;
- the agreement to purchase energy from renewable sources or for the landlord to give reasonable consideration to requests for the installation of renewable technologies for alternative energy sources;
- the installation of high efficiency plumbing fixtures and control technologies for water usage and mechanisms for recycling rain water and grey water; or
- consideration of service charge adjustments in multi-tenant premises to reflect the use of energy and water by individual occupiers.

Prior to a green lease or side agreement being drafted, it would be advisable for the landlord and tenant to jointly appoint an independent surveyor to carry out detailed audits and feasibility reviews of a building in order to highlight areas in which a property can be made more sustainable and allow for environmental issues to be embedded in the long term management plan for a building.

Matthew Lown is sustainability partner at building and property consultancy Tuffin Ferraby Taylor LLP. Tel: 020 7928 7998 or email: mlown@tftconsultants.com