Growth in Green Lease Clauses

The European Union’s aspiration to become the world's first climate neutral continent by 2050 has resulted in measures by the European Union; the Irish Government; and by property developers and investors on the ground to promote greener investments within Ireland.  A decade after the EU enacted Directive 2010/31/EU (the Energy Performance of Buildings Directive), the EU have enacted the EU Taxonomy Legislation which is a classification tool aimed at investors, owners and financial institutions to assist them in defining whether an investment can be classified and marketed as being “green”.

In practice the introduction of the Directive and underlying Regulation will affect the construction and real estate sectors significantly going forward.

Background 

Building / real estate are the largest energy consuming sector in the EU, responsible for around 40% of energy consumption and 36% of carbon emissions.  One of the key goals of the Directive is directing investments towards more energy efficient buildings.  By enabling developers to access dedicated “green” financial instruments, the Directive will stimulate much needed investment in this area. 

Market participants who do not upgrade practices in line with the Directive may lose their competitiveness and the ability to brand their economic activities and products as “green”.  In real terms this will go to value.

In Ireland “green” investments are becoming increasingly attractive for investors as they become aware of the direction in which the industry is going.  We already have the existence of a Building Energy Rating Certificate which are a necessity for selling or letting property in Ireland, with certain limited exceptions.  These have no legal effect other than to make a purchaser or tenant aware of a building's energy rating.  However, with increasing energy costs a low energy rating goes to value and thus is less attractive for a purchaser, tenant, or investor. 

Response of the Irish Legal Community

The industry has published a suite of green lease clauses for use in commercial leases and in recognition of an increased focus on environmental, social and governance (ESG) factors in real estate transactions.  Green lease clauses which promote the sustainable operation in the management of buildings are becoming increasingly important.   Beauchamps have a suite of green clauses for use in commercial leases in Ireland arising from collaborative lawyers across the world working pro bono to develop new contract provisions to help prevent climate change. 

The clauses are divided into three subsets:

1. Odhran’s clause:  Clauses promoting cooperation between landlords and tenants in relation to the environmental performance of buildings;

2. Emily and Tom’s clause:  Repair and alteration covenants; rent review assumptions and covenants for the protection of energy and sustainability ratings; and

3. Amèlie and Lauri’s clause:  Clauses incorporating circular economy and sustainability principles into service charge regimes; landlord’s regulations and landlord’s works. 

The clauses are advisory rather than prescriptive - landlords and tenants can select clauses that are suitable for their premises and their appetite for sustainability measures. 

In general terms the thrust is to encourage cooperation whereby parties with a stake in a building (typically landlords and tenants) agree to cooperate with each other to identify:

• appropriate strategies to improve the environmental performance of buildings, including the implementation of an environmental performance plan, managing waste and sharing data;

• visions for the setting up of a building management forum to agree strategies for sharing environmental performance data;

• agreeing targets and strategies and reviewing the environmental performance of the building and the premises demised by the lease; and

• provisions in relation to accessing the demised premises and metering the tenant’s energy use.

Conclusion 

The market attitude is shifting toward an ethos that is coined a 'green premium', which is an emerging trend that sustainable, and energy efficient buildings and development are the norm and not a standard to be reached but rather a baseline requirement. The converse of this would be to avoid what is termed 'brown discounting', which is an expectation that should the development or building not meet an expected efficiency level this can significantly influence the market value, rental rate etc.  Environmental laws and practices are constantly evolving as governments, the EU, businesses, NGO’s and clients seek to find solutions to fight climate change.  The clauses outlined above will be continuously adapted to reflect the changes in law and practice as they continue to grow over time. 

One thing is certain - every stakeholder in property whether they be owners, lenders, professionals or occupiers need to adhere to these changes which will likely accelerate in the short and medium term.

Should you have any queries in relation to this please contact Aidan Marsh, Partner, Commercial Real Estate, Beauchamps.