Green leases, Net Zero targets and what they mean for landlords and developers

Thrings Clean Energy green leases and net zero targets

The push to Net Zero means that it’s not just developers on new buildings who need to think sustainably – there are increasing requirements for landlords to act too.

The built environment industry is a major contributor to carbon emissions and is estimated to be responsible for 40% of CO2 emissions around the world each year. The industry therefore has a hugely important part to play in reducing global emissions.

In its widely publicised and ambitious Net Zero Strategy, the UK government has set an ambitious legislative target of 78% reduction in greenhouse gases by 2035 and a desire to achieve Net Zero carbon dioxide (CO2) emissions by 2050.

It is now widely understood that developers of new commercial and residential schemes must meet stringent targets for sustainability, by making their developments as energy efficient as possible, and by offsetting any environmental impact of their developments through mitigation schemes.

For example, Bath and North East Somerset (BANES) recently become the first Council in England to adopt a ground-breaking planning strategy obliging all new housing to be net zero and 100% self-sufficient, and for major commercial developments to have net zero operational carbon standards. New policies will also limit the carbon output during the construction phase upfront.

However, the Net Zero aspirations will not be met by the mitigation of the effects of new developments alone. Increasingly, eyes are upon what can be done with existing buildings to reduce their effect on the environment in decades to come.

The problem with existing buildings

The UK has some of the oldest housing stock in the world and it is believed that 80% of the buildings that will exist by the time the Net Zero deadline comes around in 2050 are already built today.

The problem is that old buildings are often very energy inefficient – the government estimates that 18% of commercial properties currently hold the lowest Energy Performance Certificate (EPC) ratings of F or G. The median rating in England and Wales is D.

The government has already introduced measures to address this through a scheme known as Minimum Energy Efficiency Standard (MEES), which expanded in April 2023.

From April 1 2023, it became a legal requirement for all commercial rented property to have a minimum EPC rating of E. This made it unlawful for a landlord to continue to let a commercial property with an F or G EPC rating, unless an exemption applies, and landlords of those properties may face fines if works are not done to improve the rating to an E or better.

Previously, this legislation only applied to new or renewal leases, but now applies to existing leases. The government currently proposes staged rises in the required EPC rating for commercial properties are due in 2027 and 2030. Commercial rented properties will require a minimum EPC rating of C by 2027, and B or higher by 2030. Landlords (and their lenders) therefore have just over four years to act to achieve the EPC minimum standards and protect both the rental and disposal asset value.

This will require a huge investment in retrofitting existing buildings to achieve improved EPC standards, and that comes with financial pressures, especially in a construction market struck by high material costs, supply chain issues and labour shortages. However, it is likely to be money well spent given the direct impact on future leasing and disposal valuations.

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Some buildings will be beyond saving, but in most cases, it will be more energy efficient to retrofit existing buildings than it is to demolish them and build in their place. This is especially true when factoring in the concept of embodied carbon, which measures the greenhouse gas emissions that arose from the manufacturing, transportation, installation and maintenance of the existing building’s materials, along with the environmental cost of disposing of those materials after demolition. Ultimately the whole development lifecycle from conception to completion will be pushed to limit carbon outputs, and accountability and data reporting requirements are increasing.

The rise of the green lease

Against this background, and with the wider need for corporate entities to have a full Environmental, Social and Governance (ESG) policy, landlords have their work cut out.

This results in the need to future-fit all buildings to meet the targets – so developers and landlords need a strategy of net zero interventions for all buildings, and especially those that are likely to still be in use in 50 years’ time.

One way for landlords to meet their obligations is to share responsibility for energy efficiency with tenants – after all, it is the tenant-occupied areas which will produce the majority of CO2 output in most properties.

So-called ‘green leases’ can be an effective tool for achieving this, as they include clauses and obligations which place responsibility on the tenant to help monitor and reduce CO2 consumption, increase energy efficiency, and reduce maintenance and operating costs. Longer term, they can potentially increase the future rental value of the property, for example by improving waste efficiency, water management and air quality, and the use of renewable energy.

Green leases are helpful not just for their benefit in reaching environmental targets – they also make sound commercial sense for landlords. Greener buildings often command premium rental values as tenants seek to meet their own ESG pledges and obligations, leading to potential long-term income improvement for landlords.

It’s important to remember that from a legal and practical perspective, green leases do not have to be for new buildings, nor are they a standard clause or document, and will be the result of negotiations between the parties in each case.

Many landlords are taking a staged approach – preparing supplemental documents to add minor green obligations to existing buildings/tenancies with an eye on ‘deep retrofitting’ the building once the whole building becomes vacant.

The Thrings Clean Energy and Environment Lawyers includes specialists from across the firm and its disciplines, and advises commercial developers, farmers and landowners on the legal aspects of clean energy, environment and biodiversity – including the drafting of green leases and supplementary documents. We are here to support you on your pathway to Net Zero. Find out more and contact us here.

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Thrings have expert lawyers in  Bath, Bristol, Frome Market, London, Marlborough, Romsey, Swindon, Ross-On-Wye, Lydney