Working together towards net zero – Laura Haworth and Louise Irvine write for EG
In the second article of a three-part series on ESG and sustainability, Commercial Real Estate Senior Associate, Laura Haworth, and Senior Knowledge Development Lawyer, Louise Irvine, have written for Estates Gazette on how landlords and tenants should collaborate on improving energy efficiency and reducing carbon emissions.
With the government target to achieve nationwide net zero by 2050, the real estate industry is subject to increasing scrutiny to reduce its emissions within this timeframe, if not sooner.
The key point on this is deciding where the responsibility lies and who will pay for the transition. “The industry is coming to realise that the burden is shared, and that only through collaboration can the sector, as a whole, shift forwards and deliver results.”
Irvine and Haworth explain that: “a key opportunity for landlords and tenants, across both the commercial and residential sectors, is to boost data sharing, a crucial factor in meeting net zero goals.”
By doing so, landlords will be more able to understand their tenants’ energy demands and both parties will be better informed as to possible improvements.
The evolution of green leases
“On 1 April 2023, new requirements came into force for all let commercial properties to have an EPC rating of E or above, otherwise those property owners face fines pursuant to the Minimum Energy Efficiency Standard Regulations. But this is the tip of the iceberg in terms of green lease drafting.”
There is a trend towards “dark green” lease clauses, which include provisions such as the sharing of information regarding energy use and waste management, landlord rights of entry to carry out energy efficiency works and more general provisions for the landlord and tenant to co-operate with each other to improve energy efficiency. An implication of this is that tenants “may be required to avoid using gas and for both landlord and tenant to procure their energy supplies from renewable energy providers.
“These green clauses are generally seen by landlords as a back-up. It is preferable that there is an ongoing open dialogue between landlords and their tenants, with a shared objective to move closer to net zero. The provisions in the lease are something to point to if a tenant becomes obstructive.”
Irvine and Haworth write that collaboration is key in making green clauses work since landlords are unlikely to forfeit a lease if a tenant has not provided data on their energy usage. While in the past tenants have often struck out green clauses in leases, today we are seeing much more of an acceptance as many tenants also need to demonstrate their own green credentials as well.
Fit-out for the future
Irvine and Haworth explain that landlords tend to fit-out a space to a basic level, with subsequent occupiers then altering the space in order to it make work for them.
“While there is generally a requirement for the parties to use, where possible, materials that have been recycled and/or are recyclable, often with an obligation to carry out the works with a view to achieving the landlord’s net zero target, parties are now increasingly realising the environmental impact of these frequent re-fits. There is a focus in the industry towards reducing the environmental impact of changing occupiers. There are calls for more flexible spaces so that minimal works are required for each change of use.
“If possible, it is useful to get the tenant involved as early as possible and to work together so that there is only one joint fit-out. However, this involves significant trust between the parties and a willingness to compromise to meet the needs of both.
"Another option is for landlords to retain much greater control over tenants’ works than they perhaps have done previously. Rather than just approving drawings and letting the tenant get on with it, landlords will need to ensure that the actual works meet all of the environmental targets promised in the design stage.”
“There is a focus on investment in net zero technologies, so it is expected that we will see quite a rapid development of smart tech to assist with energy efficiency. Landlords might find that fairly new systems they have installed become outdated quite quickly. The key is going to be ensuring that individual elements of smart systems can be updated without a total overhaul. This will mean making sure that systems do not use specialist cabling or that the chosen system is not limited by only a handful of people being able to do works to it.
“By working collaboratively, landlords and tenants can move towards a cleaner and greener future. But a willingness to be open and transparent is essential to decarbonising our built environment and reducing operational energy. It is in the interests of both landlord and tenants.”
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To read the first article in this three-part series, click here.