Green Leases - Are you prepared?

With the introduction of the Energy Performance Certificates (EPC’s) on all commercial premises the concept of energy efficient premises is becoming increasingly common.

Vendors are required to provide an EPC to prospective buyers on a sale of a property whilst Landlords are required to provide an EPC on the grant of a new lease to ensure that tenants are aware of how energy efficient the building is. If an EPC is not provided or prepared landlords and vendors should be aware that there are financial penalties involved.

The compliance of the EPC is only the start of the Government’s implementation of its environmental sustainability policies. Recent legislation encourages both landlord and tenants to co-operate to reduce the carbon emissions of buildings and encourage practical application of policies for sustainability. The legislation also encourages developers to comply with current environmental standards and new developments to use materials that meet carbon emissions targets and ensure that buildings are more energy efficient.

With Carbon Reduction Commitment Energy Efficiency Scheme (CRC) due to come in force on 1st April 2010 this trend is set to continue. Any organisation with energy bills over £500,000 or more per annum will be effected by CRC. Organisations will be required to buy allowances which are equal to their annual emissions and if targets are exceeded financial penalties are incurred; the flip side being that organisations will be entitled to be refunded where there is a surplus of the allowance.

With the Government imposing more penalties for inefficient buildings the use of ‘green leases’ will become more widespread. Landlords and developers see the use of green leases as an opportunity to market themselves as more socially aware and responsible and to increase their own company/ individual reputation and public image as environmentally conscious.

The main criteria of a green lease is to deal with energy consumption, sustainability, waste and waste efficiency, water consumption, recycling provisions and use of more energy efficient materials when dealing with alterations and repair.

Green leases can either incorporate absolute obligations of compliance in sustainability, in which case this will have a direct impact on any rent review, service charge or repairing obligation or the green lease can have provisions of intention for both parties to deal with reducing carbon emissions, with perhaps covenants dealing with non-compliance.

Tenants’ fears of increased costs on rent review/ service charge or repairing obligations to incorporate higher environmental standards must be carefully negotiated in view of the tendency of the grant of shorter term leases in the current climate.

Landlords will also have to consider the fact that older buildings will not necessarily be as energy efficient as newer buildings and incorporating terms complying with green provisions may be difficult and/or expensive to implement.

Although the long term benefits of having a more energy efficient building is known the immediate cost of implementing green provisions and the unknown on-going maintenance costs for green provisions in the current climate far outweighs such theoretical long term benefit and as such there is a slower tendency of uptake and implementation of energy efficient policies.

However, with the Government pushing its energy efficiency policies to deal with the carbon reduction targets set in the Climate Change Act it won’t be long before green leases become the norm.

Landlords will look to service charge provisions to recover the on-going costs for implementing green provisions whilst tenants will look for incentives to encourage more energy savings. Each party will need to carefully consider and negotiate such provisions. At Ronald Fletcher Baker we are able to help you negotiate terms catered to your specific needs including incorporating clauses dealing with energy efficiency, incentive schemes and recovery of on-going maintenance costs.

Jenin Khanam joins RFB’s commercial team at the West Office with an extensive commercial property background to discuss the contents of this article or any commercial property matters please contact her either by telephone or e-mail:

Direct dial 020 7467 5763 E-mail: j.khanam@rfblegal.co.uk

 

This article does not constitute legal advice and should not be applied without seeking specific advice and acting on any of the topics covered.

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