25 May 2023

Enforcing net zero targets – Louise Irvine writes for EG

In the final article of a three-part series on ESG and sustainability, Senior Knowledge Development Lawyer, Louise Irvine, has written for Estates Gazette on the rise of sustainable leases and the challenges around enforcement.

Irvine writes how a recent report by JLL and the BPF identified access to data – particularly on energy consumption – as a major challenge in implementing these leases, with the BPF also recommending a mandate for data sharing between landlords and occupiers. “Without accurate and timely data sharing, it will become increasingly difficult for both landlords and tenants to track against their own and industry-wide sustainability targets.”

She explains that it is difficult to enforce provisions that serve to encourage more sustainable behaviour, rather than obligate them. Even where there is an obligation for the tenant, the landlord is unlikely to forfeit a lease for such a breach. It may also be difficult for a landlord to demonstrate loss arising from breach of a green lease clause.

This is where, Irvine emphasises, collaboration between landlord and tenant is crucial.

“It has historically been more challenging to introduce green lease provisions on a lease renewal under the Landlord and Tenant Act 1954. However, this was considered last year in Clipper Logistics plc v Scottish Equitable plc (unreported, Sheffield County Court, 7 March 2022) where it was held that requirements on the tenant to preserve the existing EPC rating of the property were reasonable modernisation and could be included in a renewal lease.

“As green lease provisions become increasingly common, we are slowly shifting towards an institutionally acceptable sustainable lease. The new 8th edition City of London Law Society Certificate of Title, published in May 2023, includes a statement that tenants will not carry out alterations which adversely affect the EPC rating for the property, and that landlords and tenants will share data relating to the environmental performance of the property. These are small but promising steps towards lenders expecting sustainable lease provisions.

“The Financial Conduct Authority is making moves to investigate and tackle greenwashing, which will inevitably mean that contractual arrangements start to be more scrutinised. Green leases will need to be backed up by demonstrable steps or activity to avoid regulatory enforcement for greenwashing going forward.”

The role of regulation

Irvine explains that “as part of the government’s net zero push, there will be a major overhaul of the non-domestic Part L of the Building Regulations in 2025. In the interim, the Minimum Energy Efficiency Standard is the primary driver for change.” The goal is to achieve an EPC rating of B by 2030 and, while this may be unrealistic, it has certainly proved a catalyst in prompting action.

While we have not seen much enforcement of MEES breaches so far, it will be interesting to see if there is a rise in penalties for landlords letting below the requisite EPC rating. Irvine argues that the reputational damage incurred by sub-standard EPC ratings may do more to drive change.

“The government’s Roadmap to Sustainable Investing, published in October 2021, proposed introducing sustainability disclosure requirements into UK legislation to encourage firms (including pension funds, asset managers and investment companies) to accurately report on their ESG data and policies, and this could help to drive change.

“The Law Society has issued guidance to lawyers covering the transition to net zero, and how climate change risks may be relevant to client advice. There are already searches covering climate change risk, which raises the question of the extent to which property lawyers are required to analyse and report on this to clients, or whether this should remain strictly within the remit of surveyors and the client’s own ESG team.”

Future steps

The BPF also advocates greater collaboration between businesses and the government. To catalyse progress, landlords must learn from each other and support a system of greater transparency. “The government response refers to supporting businesses to provide “consistent and comparable data”, which has been welcomed by landlords.

"The Better Building Partnership launched its green lease toolkit back in 2013 and is expected to update its model lease clauses and guidance later this year. Lawyers are also working collaboratively through the Chancery Lane Project, a movement of legal professionals dedicated to using contracts to fight climate change and examine net zero clauses. These go beyond what we are typically seeing in the market and will help to drive the argument for significant drafting changes to meet more ambitious sustainability targets in the future.”

To find out more about Forsters’ ESG & Sustainability credentials, please click here.

Click here to read the first article and second article in our three-part series.

This article was originally published by EG on 16 May 2023 and is available here (behind their paywall).

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