In mid-December, while many of us were thinking about hanging our stockings on the mantelpiece in preparation for the festive period, around 85,000 participants, including more than 150 Heads of State and Government, met in Dubai at the COP28 UN Climate Change Conference.
This was the first measure of progress made to address climate change under the Paris Agreement, and the Conference ended with a renewed agreement to accelerate action across all sectors by 2030, signalling the “beginning of the end” of the fossil fuel era.
But what role does the commercial property sector have to play in this, and how is the sector adapting and developing to reflect a “new” normal where the environmental performance of a property is now a key consideration for any owners or occupiers of commercial property?
As well as the obvious need to transition away from fossil fuels to renewable energy with the creation of new wind farms/solar farms and other renewable energy generation, one of the main ways to tackle the issue is with so called “green leases” (or rather green clauses within a lease). Owners and occupiers of commercial property are increasingly aware of the need for climate change mitigation and recognise the importance for all parties concerned – whether for large-scale investment landlords to comply with ESG requirements or to inform the implementation of effective asset management and drive asset value, or for occupiers to reduce their operating costs.
Green Leases
Broadly speaking, green clauses in leases help manage and improve the environmental performance of a building and reduce its environmental impact. There are existing tools to help guide owners, occupiers and solicitors in this area, including the Better Buildings Partnership’s “Green Lease Toolkit” and a range of standardised green clauses in the leases produced by the Property Standardisation Group.A Scottish version of the Green Lease Toolkit is now available.
These encourage parties to positively engage to develop strategies for driving improvements to energy usage and waste which best fit their individual properties, and which if not addressed can negatively impact a landlord’s ESG credentials, as well as those of an occupier.
We are increasingly seeing a trend towards more comprehensive green clauses (known as “dark green” provisions – as opposed to “light green” provisions, which are generally less prescriptive and often optional) within a lease, imposing more stringent obligations on both landlords and tenants. This is partially in response to the Scottish Government’s commitment to reach net zero by 2045, but also to increasing demand from owners and occupiers themselves, keen to demonstrate their own “green” credentials in a competitive marketplace.
Delivering net zero for Scotland's buildings – Heat in Buildings Bill – consultation
As part of the Scottish Government’s commitment to reach net zero by 2045, in November last year, it published its consultation on proposals for a Heat in Buildings Bill, incorporating proposals for minimum energy efficiency standards (MEES) for homes in Scotland.
The Scottish Government is now proposing a two-pronged approach where (i) it will set a MEES that will apply to homes only – i.e. not to non-domestic buildings, coupled with (ii) a move towards prohibiting what are termed "polluting" heating systems in all buildings (i.e. systems that are fuelled by fossil fuels, like gas boilers, oil boilers and LPG) to be replaced with "clean" heating systems, such as heat pumps and heat networks.
The consultation provides that all buildings, including commercial buildings, must have replaced a polluting system by 2045, after which all such heating systems will be prohibited. It proposes an interim trigger mechanism to replace a “polluting” heating system when a property is purchased – although to be clear, this is not a ban on selling buildings with a polluting system, but rather a proposed obligation on the buyer to replace a “polluting” system within a defined grace period after purchase (which the consultation suggests being between 2-5 years).
Minimum Energy Efficiency Standards
It is worth noting that while there is already some divergence between the UK and Scotland on MEES and environmental principles generally, not least in the respective governments’ commitments to reach net zero – Scotland by 2045 and the UK by 2050, this will potentially reduce over time as the deadlines for net zero approach.
In England and Wales, the existing MEES rules currently state that non-domestic properties are required to hold an EPC rating of at least an “E” to be classed as lettable, whereas in Scotland, there are currently no proposals to impose a minimum rating for non-domestic properties. The UK Government recently announced plans to review its MEES policy but has made no commitment to further increases in minimum standards. Scotland also has a slightly different EPC regime to England and Wales with different standards, so the ratings aren’t exactly equivalent between the different jurisdictions.
Conclusion
The drivers for change continue to grow, so green leases are here to stay and are likely to become increasingly “dark green” as the deadlines for net zero commitments approach.
As the BBP advises, parties should seek to positively engage as early as possible to identify, collaborate and develop strategies which fit their own individual properties – there is no standardised approach. Green leases have the potential to create advantages for both owners and occupiers in improving the environmental performance of their building, but there needs to be ongoing discussion within the sector and a balance struck between the costs of implementing green strategies and who should bear those costs.
The Green Lease Toolkit states: “opportunities to make significant environmental improvements exist within many commercial buildings, yet the reality is we are not seeing the rate or scale of change required if we are to stand any chance of meeting the government’s carbon reduction targets”. It is increasingly incumbent on owners and occupiers of buildings to embrace a greener way of using and occupying buildings, as the net zero deadlines approach.
If you are a landlord or tenant and have any queries regarding green leases, please contact Stuart Dick, or your usual Shepherd and Wedderburn contact.