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Real Estate

BHSM LLP | Ireland

“Green” leasing of Irish commercial real estate

Introduction

When a new technology or way of doing things successfully disrupts a market, the pattern usually follows an initial phase of early adoption by a few bold innovators followed, very suddenly and dramatically, by a hyper-adoption phase in which those new technologies or approaches become the new norm seemingly overnight. Real Estate in all its facets is no exception to this phenomenon. How we design, build, finance, manage, sell or lease real property is in a constant state of innovation, and within this space a new idea will from time to time take root and quickly proliferate. The legal profession must follow and adapt to these shifts in drafting legal agreements that are fit for purpose.

For the purposes of the present article, the paradigm shift of the day is the rise of “Green Leases” and the factors underlying this, with a focus on Ireland. We take a snap shot of the market forces, societal trends and legislative agenda driving the greening of Real Estate generally, together with a high-level summation of clauses actually appearing in green leases of commercial premises.

Market Forces

The CBRE Market Outlook[1] is a highly anticipated annual outlook report setting out likely trends in the commercial real estate market for the year ahead in Ireland. This year’s edition noted research identifying for the first time in this jurisdiction the ‘green premium’ that sustainability certified buildings generate over their peers (and conversely the ‘brown’ discount applying to outmoded offerings). This appetite for sustainability was also reported to be felt keenly in the funding sphere, with capital drawn to the development of new schemes as well as the retrofit and refurbishment of existing stock to Environmental Social Governance (ESG) standards as lenders come to realise the implications of sustainability for the value of the security backing their debt investments. While the focus in this area tends to fall on high-profile office developments in particular, in the commercial real estate sphere the importance of sustainability is also being felt in the industrial sector, with CBRE noting that logistics operators in particular are seeking to incorporate renewable power sources such as solar panels and charging points for electric vehicles as they confront the challenges brought by climate change to transport and the supply chain. The retail sector has also begun to embrace ESG, with Savills reporting that M&S have been implementing green leases across its portfolio.[2]

International certification initiatives in ESG such as Leadership in Energy and Environmental Design (LEED) (particularly attractive to US based clients) and Building Research Establishment Environment Assessment Method (BREEAM) (the UK equivalent) have grown in prominence as a metric and signifier of a building’s green credentials, boosting asset value and attracting quality tenants. Such certifications are sufficiently adaptable to cover the performance of a building considered as a whole or particular aspects of the building, whether at design and build phase, tenant fit-out or ongoing operation and maintenance throughout the lifetime of the building. Certifications come with an expiry date and must be maintained and renewed, requiring an ongoing commitment to maintaining sustainability standards. Ireland-specific initiatives and collective interest groups have also emerged, with investor-led groups such as Ireland’s Sustainable & Responsible Investment Forum, the multi-stakeholder Irish Green Building Council and the Sustainability Energy Authority of Ireland’s (SEAI) rating for Excellence in Energy Efficient Design (EXEED) among the prominent domestic expressions of this voluntary ‘green’ drive.  

The Legislative Agenda

The greening of our real estate is expressed and codified in the first instance through the ‘soft law’ focus of ESG initiatives and certifications as well as the growing bank of black letter law requiring a greener tint in our buildings and the contracts which govern their construction and operation. The CBRE Outlook notes that “with EU taxonomy regulation now impacting on both the ability to source funding and the cost of capital, borrowers are keenly aware of the importance of sustainability and their duties in that respect.” A commercial lease will already include sweeping provisions requiring the Tenant to observe the requirements of statute and otherwise the measures imposed by local authorities and other competent authorities as they arise from time to time. As such, as additional hard law obligations come on stream through domestic or EU channels, tenants will be expected and contractually obligated to always ensure full compliance with the current legislative scheme. The ongoing revision of the EU Energy Performance of Buildings Directive (first published back in 2002 and since recast) is central to the legislative agenda in boosting building energy efficiency. This Directive required that all new commercial buildings achieve a nearly zero energy rating by 31 December 2020. The revised directive sets out how Europe can achieve a zero-emission and fully decarbonized building stock by 2050 and includes for the first time EU-wide minimum energy performance standards for the worst performing buildings and a requirement for Member States to put policies in place to stimulate the refurbishment of existing stock. The burden of decarbonization is also explicitly applied to buildings in the public domain by EU law, with Article 6 of the EU’s Energy Efficiency Directive requiring that at least 3% of the floor area of buildings owned by public bodies are renovated every year up to nearly zero energy building (NZEB) standard. At an Irish domestic level, the passage of the 2021 Climate Action and Low Carbon Development (Amendment) Act 2021 in Ireland sets ambitious targets to achieve a climate neutral economy by 2050 and a 51% decrease in emissions generally by 2030.

The Components of a Green Lease

What then are the emerging themes of ‘green’ commercial lease provisions themselves? A green lease is simply a commercial lease which contains additional clauses providing for how a premises is to be occupied, operated and managed in a sustainable way. The provisions run the gamut from the granular to the sweeping, the specific and measurable to the aspirational.  There is no standard text or industry-wide template at this time, with collaborative focus groups[3], individual institutional investors and asset managers as well as law firms themselves all developing and refining their own precedents to target optimal outcomes for particular stakeholders.  

At the helicopter-view level of guiding principles, a green lease will usually contain a declaratory statement by Landlord and Tenant acknowledging their mutual responsibility to the climate and posterity and undertaking to work together to limit emissions and use resources economically.

A typical green lease will focus on energy efficiency, waste reduction and water use. Exchange of consumption data is essential, facilitated by digital metering of utilities. Regular audits should be scheduled to review the data and inform sustainability strategy and investment for the following period. Use of renewable energy and low carbon technology where practicable will be encouraged or prescribed. The parties may specify use of energy efficient bulbs and office/kitchen equipment, and even sustainability certified cleaning products, at the outset to set a baseline standard. More holistic green leases may even consider building biodiversity initiatives (bee houses, living walls etc.) or green travel plans (cycling facilities, e-charging points).

In addition to entirely novel provisions, a green lease must also look at the suitability of traditional standard clauses in the area of fit out, alterations repair, yield-up or future Landlord works. Landlords may for example press for explicit rights to veto requests for consent to works which do not meet the sustainability goals agreed to by the lease parties, or to otherwise consult extensively before and during the works to ensure that the works are implemented sustainably without causing unreasonable economic hardship to the Tenant. As well as imposing positive obligations on the parties, the lease may contain negative covenants, for example on the tenant not to do anything which would undermine certifications achieved for the building (whether LEED or otherwise) as well as positively incorporating the maintenance and renewal of sustainability focused infrastructure as part of their repair and yielding up covenant.

Cost – and the allocation of cost between Landlord and Tenant – is also a key focus of green lease provisions. These may be the costs incurred by the Landlord in procuring building day to day services to a multi let building, which costs are typically recouped via a service charge. A Tenant will be reluctant to sign a blank cheque allowing the Landlord to choose the most sustainable options here regardless of cost. Often, the green alternative will, for now at least, incur a premium in cost over the status quo, and the parties will need to agree a framework for how much of a premium they are willing to countenance, and who will bear that cost. Provisions may also address current or future taxes or local rates, or other charges directed towards incentivizing sustainable practices, and who will bear the cost of these. Likewise, the Landlord’s right to undertake ‘capital’ once-off works to enhance energy efficiency, water use etc. must be balanced against cost (particularly where that cost will ultimately be borne by tenants) as well as the general impact of the works themselves on the Tenant’s use and enjoyment of their premises. The Tenant is entitled to quiet enjoyment of their demised premises and could seek to injunct any landlord works which contravened this right or seek compensation for disturbance caused, as a matter of contract law.

Ongoing dialogue and consultation will be a focus of the green lease provisions both in relation to allocating cost and monitoring and evaluating performance during the lease term, with designated contacts appointed to review and potentially expand sustainability goals over time.

Ultimately a commercial lease, like any contract, is an expression of compromise and negotiation, reflecting an agreed position between parties of varying commercial strength who may or may not share the same priorities, particularly in newer spaces such as ecology or indeed wellness. A lot will depend, equally, on the context of the letting – for example whether the tenant is taking a full repairing and insuring (FRI) lease of an entire building (under which the tenant is responsible for repairing and maintaining the entire structure and all services etc.) or a tenancy of part only of a multi-let building with multiple tenants and services to shared common areas where overall responsibility for the structure of the building rests with the Landlord.

An important consideration in integrating these provisions into commercial leases in Ireland will be that the obligations on the Tenant and/or the Landlord are set out in as much detail as possible. This will avoid a scenario in which provisions are left open to dispute and found to be “void for uncertainty” by the courts. This should not however preclude the parties from setting out their intentions in a way that allows flexibility to choose the green option where the costs of this are not prohibitive. 

Pragmatic concerns also abound for practitioners to ensure that these new measures do not conflict with the existing legal and regulatory framework. One very net example would be providing that the provision for exchange and use of consumption data as part of smart systems for the operation of a building do not infringe on GDPR obligations.

Conclusion

Green leasing in Ireland is still in its infancy (particularly when it is noted by contrast that some 34% of occupiers globally already have green clauses in their leases) , however there is every indication that an inflection point in this market due to economic, societal and legislative factors touched on in this article. Adoption is likely to continue to be led initially by ‘big tech’ and institutional tenants and forward-thinking landlords as new office industrial and retail developments come on stream, as well as the proliferation in the retrofitting of existing buildings to sustainability focused standards.

 

[1] https://www.cbre.ie/en/research-and-reports/cbre-ireland-annual-outlook

[2] https://www.savills.co.uk/blog/article/283209/commercial-property/in-plain-english–green-leases.aspx

[3] See for example the Better Buildings Partnership , which has issued a ‘Green Lease Toolkit’ to provide commercial property owners with appropriate environmental clauses for standard commercial leasing agreements.

Written by:

Keith Doyle

kdoyle(et)bhsm.ie

+353 (0)1 440 8300

Article from – TRENDS Real Estate No 9

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