GREEN ISSUES ADDING VALUES: THE IMPORTANCE OF GREEN LEASES
Philip E Wilbourn BSc C.Env FRICS

Introduction
If we were honest most lease structures currently used in the United Kingdom are set out in such a way as to provide a disincentive to making enhancements to environmental performance or the energy efficiency of a building. They have not been seen as worthwhile either for the occupier or the developer. In many cases there is a disincentive for improving the energy efficiency of a building because the person paying for the improvements does not share in the savings. Therefore capturing the costs and benefits of investing in energy efficiency requires a change in a typical lease.

The origin of Green Leases are found in the Australian market. Some commentators view the Australian economy as having a more advanced approach to sustainability. Therefore Green Leases are not an un-common issues with tenants. On occasions tenants also demand that their landlords adhere to specific standards such as energy consumption and re-cycling. In the United States the building industries are beginning to make a significant shift towards sustainable buildings although in the UK its landlords who appear at this stage to be taking the lead.

Many occupiers have well stated obligations in line with their Corporate and Social Responsibilities whereby the development of a Green agenda is a fulfilment of this.

What are the benefits of a Green Lease?
The Green Lease can reward energy efficiency with reduced overhead costs passing to the owner and being passed onto the tenant.

• While Energy Performance Certificates (EPC’s) measure the environmental impact of the building itself and will be the responsibility of the property owner the EPC’s will rate the occupier on their use of the building. Perhaps with fiscal changes in the future and the importance of EPC’s to valuation as set out in UKGN1 of the Valuation Standards of the RICS there are value added benefits.

• Developers are increasingly being driven towards the importance of green design by our political initiatives namely the Part L Building Regulations code. Such green design can produce efficient, pleasant buildings without an increase in cost, meaning that they are less expensive to operate. These savings therefore go to the bottom line of the tenant and improved service charge efficiency.

• If green buildings work and valuation evidence proves that they are more valuable because they are more marketable, the higher rents may make it worthwhile the developers speculating higher building specifications to build such a green building.

• If a green lease is to be developed and successful both the landlord and the tenant have to sign up to the green agenda and both try and achieve maximum energy savings while imposing the excessive and costly obligations on either of them.

Green benchmarking
There are a number of key points which need to be considered before Green Leases are entered into by either party these are as follows:-

• The development of an environmental policy both corporately and for individual buildings. Building will require an EPC if they are being sold or let above 50m 2 square metres and the second part of the EPC is for energy efficiency improvements to be undertaken. Realistic energy efficiency targets can then be set. These would have to be measured more than once every 10 years though.

• Tenants will expect more data regarding energy efficiency made available not just in the form of an EPC but about running costs of the building overall. Lifecycle analysis is going to be increasingly important.

• In the terms of development both parties will have to maintain some control over elements of design while tenants are requiring improvements to fit out their space. A fit out will change the thermal dynamics of a unit and this needs to be understood if energy performance and efficiency is to be maintained. Otherwise is dilapidation going to be created if the building is proven to be less efficient when the tenant vacates?

• Both the landlord and tenant should be under an obligation to reduce energy consumption, water usage and waste in the re-cycling of materials generated from the building. Targets should be set and measured.

• There may be a need to have an independent suitably qualified chartered environmental surveyor to carry out regular audits of the building and assess whether the occupiers are complying with the environmental policy. They need to determine whether the targets have been met because this is likely to be a fertile area of dispute in the future and the need to provide a robust mechanism to resolve disputes between landlord and tenants is essential.

• It might be important to provide some form of financial incentive to meet specific energy performance targets that may also include financial penalties if the party fails to meet those targets.

A wish list of good practice
There may be some important issues which may be essential in a green lease. This includes that:

• The tenant uses the cleaning and waste removals provided by the landlord which have been audited by the landlord to be energy efficient and comply with current health and safety legislation.

• The landlord may need to carry out repairs and modifications to the building to improve energy efficiency which would normally encroach upon the tenants quite enjoyment.

• If the tenant requires a change of use or an alteration to the premises including installation of partitions and lighting the landlord may wish to refuse consent if this adversely affects energy efficiency of the building. It will be an interesting case to see whether or not this is grounds for a reasonable refusal of consent in the courts.

• There may need to be more transparency between the landlord and the tenant to ensure the efficient management of the environmental policy.

• The service charge contributions may reflect the success of otherwise of individual tenants in meeting specified energy targets.

• An obligation that the landlord ensures that all buildings systems operate to the maximum efficiency levels certified by an appropriate professional.

• There may also be an obligation that a landlord monitors energy consumption lower levels for example air conditioning were appropriate to meet energy proficiency targets. There should not be a compromise however to Employment Law or Health and Safety legislation.

• A greater co-operation between the landlord and the tenant to implement environmental friendly travel to work policies for example providing bike racks.

In conclusion Green Issues are here to stay and this will increasingly drive occupier demand as they seek to offset their lifecycle costs which could be a corollary of a Green Agenda.

References:

http://www.pinsentmasons.com/media/1153939890.pdf
http://www.bcsc.org.uk/publication.asp?pub_id=239
http://www.greenleases-uk.co.uk/
http://www.lcca.co.uk/server.php?show=ConWebDoc.95
http://www.propertyweek.com/story.asp?storyCode=3113915
http://www.bco.org.uk/research/researchreports/detail.cfm?rid=122&cid=0
http://www.nabarro.com/Downloads/Green%20Leases.pdf
http://www.burgessalmon.com/what_we_do/Practices/real_estate/Publications/Top_Storey_Green_ Leases_Special.pdf
http://www.savills.co.uk/content.aspx?type=Commercial&id=9958&contenttype =research&nodeId=20#
http://www.mms.co.uk/Property/html/article.asp?articleID=740
http://www.kingsturge.co.uk/professional/green-leases/index.htm
http://www.sustainca.org/content/green_leases_toolkit http://www.shoosmiths.co.uk/news/1162.asp
http://www.langmichener.ca/index.cfm?fuseaction=content.contentDetail&id=10 175&lid=0