How green is your lease?

1st November 2010

How green is your lease

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The Green Lease Code should help both landlord and tenant to work together to promote environmentally-sound activity via lease terms, says Cathryn Pernstich.

Asignificant proportion of businesses will occupy a premise under a lease to carry out their operations.

Statistics show that nearly 30 per cent of all carbon emissions emanate from commercial premises, and with the focus very firmly set on lowering those emissions and their impact on the environment, is it time for manufacturers and other business premises users to consider the extent to which their leases are green?

In this article we look at: the traditional approach to the ‘green' content of a business lease; a modern day approach; enforcement of the ‘green' element; and what benefit the introduction of a ‘green' element into a lease could bring.

So, what is ‘green'? It can mean several things depending on the type of business being operated, but it would be fair to say that an overriding principle is the reduction of the environmental impact of the business. This can include considerations given to:

  • the energy efficiency of a premise;
  • the sustainability of a premise;
  • corporate social responsibility (CSR) of a business; and
  • the environmental impact of the manufactured end product, including its supply chain.

‘Green' can also have different emphases allocated to it. If we use colour shadings as a reference point, then a limited commitment to environmental issues would be described as being light green and a significant level of commitment to environmental issues would be described as being dark green. There will of course be those businesses that fall in between these two extremes.

Traditional lease provisions

Traditionally, a business lease will probably not give significant consideration to the environmental impact that the use of the premises and running of the business will have upon the environment.

It is likely (using the colour shading idea) to be light green in its impact, possibly rising to a medium shade in some circumstances. Occasionally, a traditional lease will have a dark green shade of compliance within it, but there are usually specific circumstances which dictate the need for this.

For example, a traditional lease is unlikely to contain provisions requiring a tenant to do things like

  • managing waste and water use,
  • using sustainable materials for repairs and alterations or promoting ‘green' transport, such as cycle storage facilities, showers and car sharing.

Indeed, lease provisions normally concentrate on the obligations that both the landlord and the tenant have to comply with. On the part of the tenant, these will be to pay rent and comply with regulations as to the use of the premises.

On the part of the landlord, these will be primarily to grant services to the tenant and to allow the tenant to quietly enjoy the premises, ie occupy without interruption by the landlord.

In some circumstances (often where there is an institutional landlord or the property is on an industrial estate), the lease provisions will go as far as apportioning the environmental liability of both the landlord and the tenant, ie determining who is liable for the cost of cleaning up any pollution caused.

What will often be agreed is that the tenant is liable from the date of the lease and the landlord for the period before that. The business becomes green by cleaning up pollution, rather than an emphasis being put on reducing it in the first instance.

There will also be an obligation on the tenant to comply with all legislation in force. By default, this will require the business to comply with some green initiatives - the Carbon Reduction Commitment Energy Efficient Scheme (CRC) (if it is applicable to a business) and the Waste Electrical and Electronic Equipment Regulations (WEEE) being two examples. Again, what this shows is a need to be green not because a business wants to, but because a business has to.

Darker green

But can a lease go further in making a business a darker shade of green and should it try to? Obviously there is more to being green than simply complying with legislation and a more holistic and wider-thinking approach needs to be embraced by business to give more than lip service to the notion. A business needs to think outside the box and look at all areas - the production of its end product, how its employees get to work, the disposal of its waste, its energy consumption and the construction of its premises to list but a few!

Trying to fit these ideas into the lease of a premise can be a challenge, but a new code of practice that has been trialled and reviewed over the past year has put forward a means of embracing these components. The Green Lease Code promotes a way in which a landlord and tenant (or group of tenants in a multi-let building or site) can work together to achieve running a business with a shade of green. The Green Lease Code suggests:

  • sharing information on energy consumption and water usage between tenants with a view to cooperating on reducing the amount of energy and water used and developing building waste strategies for multi-let buildings or sites or even neighbouring buildings or sites;
  • putting in place recycling policies;
  • creating a sustainable building management programme to set, review and implement targets;
  • creating transport policies; and
  • using materials and local contractors in fit out and refurbishment schemes.

These are all measures that can be considered by a business looking to lessen its impact on the environment but what should happen next?

First and foremost there needs to be a mindset to take these principles on board. With so much more environmentally-based legislation being passed through Parliament and businesses becoming more aware of their CSR, this is definitely working its way up the management agenda.

Whether or not a business occupies a premise on an existing lease or is about to take on a new lease, green principles can be incorporated. With an existing lease, The Green Lease Code suggests that a Memorandum of Understanding is entered into between the landlord and tenant.

This sits alongside the existing lease and runs in conjunction with it. Whilst it does not automatically pass to the next tenant, meaning a new Memorandum of Understanding would need to be agreed on the lease being sold, and whilst it is not a legally-binding document (which would make enforcing it for non-compliance difficult), it is a good step forward in lessening a business' impact on the environment.

If the Memorandum of Understanding were not complied with then a party would need to rely upon the goodwill of the other to actually turn matters around and abide by it. Using our colour shading principle, this would be a lighter green option for a business.

There is nothing to stop the Memorandum of Understanding approach being taken if a new lease is being entered into. Alternatively, the same sort of provisions can actually be incorporated into the body of the lease.

The advantage of this approach is that the requirements are legally binding, so effective enforcement action can be taken for non-compliance, and they can be passed onto future owners of the lease. This would be a dark green option for a business.

Apart from having the satisfaction of complying with environmental legislation, by embracing and actioning some or all of the above principles, a business would also fulfil its CSR in this area. A business' interface and profile with the consumer/customer can be raised, particularly with those who will consciously look for products manufactured with such an approach - there are plenty out there!

It is worth considering that there is still a degree of PR (public relations) capital to be derived from businesses ‘getting greener', but that will disappear completely if future legislation compels them to do so.

And if procedures are adopted and put in place now then the long-term benefit will more than outweigh the initial costs. For example, if a premise is equipped so it is energy and waste efficient then its running costs will be less and its commercial value will rise.

Consequently the landlord may realise a higher return on investment. It is possible that a premise at the forefront of these changes will have higher rental values, but as more and more businesses adopt this approach and the playing field levels out, so arguably, should rental values.

It is not easy being green, but it is something that needs to be embraced. The recent recession is not making choices easy either, as cash flows are/have been limited making it a challenge to decide upon what to spend free cash (if any).

In the long run, however, if we, as a business nation, are to reduce our impact on the environment then action does need to be taken, sooner rather than later.

The question is, will you do it voluntarily or will it require the Government to legally enforce it?


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