The Report re-iterates that the real estate industry has seven years to halve emissions and the window for effective action is closing rapidly. To achieve this target, the industry as a whole needs to transform the way it uses and manages buildings.
Despite the emergence of green lease clauses over 15 years ago and some progress being made, there is still a lack of industry-wide guidance and uniformity. Moreover, the report highlights the need to transition from “Green Lease 1.0” to “Green Lease 2.0”, a more flexible and holistic approach implemented throughout the lifecycle of a lease and which also addresses the social and governance aspects of ESG.
We summarise five key takeaways from this year’s research and what “Green Lease 2.0” really means:
1. There are three vital ‘enablers’ to drive this change:
a. Education: Green Leasing 2.0 requires education, upskilling, multi-stakeholder collaboration and behavioural change to achieve a ‘leapfrog moment’ at scale.
b. Engagement: Green Leasing 2.0 goes beyond contractual lease clauses – it means ongoing voluntary collaboration between landlords, occupiers and third-party stakeholders to deliver on ESG goals throughout the life of the lease.
c. Equity: Green Leasing 2.0 represents a new business partnership on building management, operation, and financing, involving cooperation, cost-sharing, and co-investment between landlords and occupiers, as well as transparency on goals, plans, and risks.
2. Assemble the right team: Including but not limited to, a leasing agent, surveyors, lawyers, sustainability experts, project developers, facility managers and operations teams to assist both the landlords and the occupiers.
3. Beyond Carbon: Circularity, climate resilience, and social impact principles are also becoming part of green leasing, with social value gaining more attention in the leasing process as corporations aim to meet all their ESG objectives more holistically.
4. Creative allocation of costs: One of the biggest obstacles to green leasing is liability for costs. In a standard office lease, a landlord is usually responsible for capital expenses which improve their asset whilst the occupier receives the benefit and covers operational expenditure. This status quo is changing in relation to environmental improvements. Creative negotiations are now required, a couple of suggestions of which are below:
a. The costs of any capital improvements to the building that reduce the building’s energy expenses could be cost capitalised and amortised as an annual operating expense. Unreasonable expenditure may be mitigated by the charge for yearly amortisation being capped at the actual reduction in operating expenses.
b. Occupiers could purchase energy from on-site renewables provided by the landlord via a Power Purchase Agreement (PPA). Landlords could install, own and maintain the on-site generation and sell power directly to the occupiers at a fixed rate that is at or below the electricity rate offered by local utilities.
c. At the heads of terms stage, potential occupiers could agree to sign a lease extension or agree to a higher rent if an owner covers the capital expenditure of a proposed retrofit.
5. Climate resilience: Green leasing 2.0 also seeks to mitigate future natural hazards. The owner and occupier may wish to agree to which natural hazards are relevant to the property and draft a new, or amend an existing, building resilience plan. Potential adaptation measures may include retrofits to the property where possible.
90% of office stock is over 10 years old, and even buildings delivered just five years ago will likely require major efficiency improvements. In London, there is currently 8 million square foot of development in the pipeline for Net Zero Carbon buildings between now and 2026 to serve the 19.2 million square foot of office space required between now and 2030 by 693 office occupiers that have signed up to Science Based Targets. The result? A huge supply and demand gap. To some this may seem like an obstacle, to others, a huge opportunity. As such, we look forward to seeing how these concepts progress throughout 2024 and beyond.
How we can help
At Lewis Silkin, we have an experienced team available to provide comprehensive support for landlords and occupiers who are considering future-proofing existing leases, entering into new green leases or simply finding non-binding alternatives to further their environmental objectives.