In the first of two articles on decarbonising UK building stock, we explore the key legal agreements being struck between landlords and tenants to tackle emissions
The UK's commercial building stock currently represents 23% of its built environment carbon emissions. As the adverse impacts of climate change intensify, decarbonisation is at the forefront of everyone's agenda, particularly since the UK became the first major economy in the world to pass laws to achieve net zero carbon emissions by 2050.
To this end, the UK Green Building Council (UKGBC) has published a Net Zero Whole Life Carbon Roadmap, which outlines a common vision and industry-wide actions for achieving net zero carbon in the construction, operation, and demolition of buildings and infrastructure in the UK. To achieve these climate goals, both new builds and existing building stock must minimise both embodied carbon (carbon emitted during construction/refurbishment of a building) and operational carbon (the carbon emitted during the in-use phase of a building).
In this article (the first of two we will be publishing on decarbonising the UK's building stock) we look at some of the key legal provisions we are seeing in legal agreements between landlords and future occupiers.
Many landlords are now including green provisions in their letting documents for new builds to optimise environmental performance both during the construction phase and the operational life of the new building. Importantly, many landlords are taking this approach to achieve a competitive advantage when it comes to attracting new tenants who are driven by their own corporate values and statements around environmental standards and sustainability.
Green Provisions for New Builds
A spectrum of green provisions is developing in the market — they may range from a duty to co-operate (but not necessarily agree) to strict legal obligations and the implications of this in terms of enforcement is examined below. Examples of green provisions we are seeing are as follows:
In agreements for lease (AFL) which largely provide for the operative provisions that determine obligations and rights relating to the construction phase of the development:
- A Focus on Specific Certifications: Landlords/developers are agreeing strict obligations to achieve a range of certifications from the Building Research Establishment Environmental Assessment Method to the WELL Building Standard and, of course, on Energy Performance Certificates for the base build. Which rating is targeted will depend on the design and procurement of the building but we are often seeing a combination of a strict target at one level accompanied by an aspirational target at a higher level. On EPCs all commercial buildings will by 2030 need to have a minimum rating of B and a 2021 government consultation indicated there may be an interim milestone of C by 2027. That means any tenant should be requiring a landlord to achieve this rating as a minimum otherwise its own use and enjoyment of the premises (for instance its ability to underlet) will be impaired. For further information on EPCs, please click here.
- Offsets: Landlords/developers are focusing on ways to reduce the embodied carbon involved in the construction of new buildings. Many are using modelling tools such as NABERS Design for Performance to help with this process and calculate the amount of embodied carbon being used. Tenants, meanwhile, are wanting landlords to commit to net zero developments, and we are starting to see commitments from developers to buy UKGBC accredited offsets to achieve this outcome. It is important to appreciate this is not a one-way street; we are also seeing tenants willing to acquire similar offsets to achieve net zero carbon in relation to their fit outs.
- Fit Out: Tenants are committing also to achieve a certain certification for fit out works and to comply with the relevant BREEAM criteria.
- Sustainability Commitments: There are also a range of additional bespoke commitments from both landlords and tenants that are starting to appear in AFLs. For instance parties are agreeing:
- to limit waste to landfill by an agreed percentage or entirely;
- to use delivery consolidation services to limit road trips to and from the development for base build and fit out purposes; and
- to engage in specified elements of the circular economy to improve sustainable performance.
In leases, governing the operational phase of the building's life:
- Enhanced Sustainability Focus in the Alterations Provisions: Increasingly, the lease terms will prohibit the tenant from making any alterations which may adversely affect the initial EPC rating, and/or require the tenant to consider the impact on energy efficiency of proposed alternations. Parties may also wish to consider whether a requirement for tenants to reinstate alterations should be able to be relaxed (at the landlord's discretion) where this would adversely affect environmental performance. If the landlord wishes to have control to carry out works to improve environmental performance, it should ensure it has a right of entry for this purpose, including monitoring and measuring environmental performance (with or without the tenant's consent) and also seek to agree how the costs of the works can be allocated to tenants (see Service Charge below).
- Data Sharing and Sustainability Forum: Parties are agreeing to strict obligations as to data sharing requirements linked to improving the operational performance of the base build and demised parts of the building. Landlords are also agreeing to establish a Sustainability Forum where tenants across the building will come together with the landlord and its building manager to agree an environmental performance plan for the building.
- Service Charge: Traditional service charge provisions are being updated to permit the recovery of costs relating to monitoring and providing for increased environmental performance For example, improvements to recycling and waste management facilities, or works to improve energy, waste and water efficiency in the common parts of a building, or higher costs for sustainable power/green energy may be considered for inclusion in the service charge. There is still a balance to be struck between initial capital costs to be borne by the landlord and costs that can properly be charged as part of the service charge.
- EPCs: A well-advised landlord will seek control over the EPC process, particularly given the changing minimum standards in this area. For example, a landlord will ideally look to retain control over procuring the EPC and appointing an assessor and impose a duty for tenants to co-operate.
- Rent review: Where either party has the right to carry out works to improve environmental performance, it must be agreed how these works will be treated at rent review.
Enforcement of green provisions in leases
Traditionally, a lease sets out the rights and obligations of both parties. At a basic level, the landlord may let the premises to the tenant, agree to provide services/insure the building and give the tenant quiet enjoyment. In exchange, the tenant agrees to pay the rent and comply with obligations regarding the repair and use of the premises. If either party does not comply with its obligations, the other may take action to enforce them or sue for contractual damages.
Green leases change that dynamic, as the parties frequently assume a joint objective to optimise the energy efficiency of the building and reduce environmental impact. Therefore, collaboration between the parties is critically important to the success of a green lease, probably more so than the existence of strict legal obligations. The developing spectrum of green leases and options for enforcement depend on the extent of obligation agreed in the lease. It may be easier to establish a breach of provisions imposing a strict legal obligation than those imposing only a duty to co-operate. We offer some general observations below:
- Forfeiture: Technically, a breach of a green lease provision by a tenant may be a trigger for forfeiture, depending on the drafting of the re-entry clause. For example, a common trigger is a material breach of the tenant's covenants. If a breach is sufficient to trigger the clause (which is a question of fact or degree), the landlord first needs to serve a notice under s.146 of the Law of Property Act 1925 and give the tenant a reasonable time to remedy the breach (if the breach is capable of remedy). If the breach is not or cannot be remedied then a landlord could in theory proceed to forfeit. A well-advised landlord would not seek to forfeit by peaceable re-entry, due to the risk of the tenant arguing the right to forfeit has not arisen. This is particularly the case where there are issues of materiality of the breach, as the landlord may find itself on the receiving end of a damages claim by the tenant for wrongful forfeiture if the landlord forfeits the lease before the right has actually arisen. Tenants may also seek relief from forfeiture, even where the right has properly arisen. In deciding whether to grant relief, a court will consider the surrounding circumstances. Even if a re-entry clause can be triggered by any breach of the lease (ie not qualified by materiality), a fact-specific, minor breach of a green lease provision may lead to a court granting the tenant relief. Therefore, successful forfeiture of the lease for breach of a green clause may be too draconian.
- Injunction: An injunction may be considered to compel a tenant to comply with its green lease obligations. However, as has been demonstrated in the attempted enforcement of keep-open clauses, the court will not order an injunction where it requires continued supervision from the court to enforce it. This route is the most expensive and should only be considered for the most serious breaches.
- Damages: A landlord may try to pursue a damage claim for breach of green lease provisions, but may run into issues, namely that (i) its loss may be uncertain and difficult to quantify (particularly in a multi-let building) and (ii) it may be difficult to prove on the balance of probabilities the breach caused the landlord's loss when applying the usual tests.
Enforcement of green lease provisions is therefore likely to be difficult using traditional methods. Parties should instead consider more co-operative alternative dispute resolution procedures in the lease, including an escalation process. Nevertheless, the inclusion of green clauses in leases is likely to bring about behavioural change and cause parties to collaborate in respect of these provisions.
The market is experiencing increasing numbers of green provisions in AFLs and leases and landlords are advised to consider how their inclusion may assist not only in meeting their sustainability targets but also increasing the commercial attraction of the new building to tenants. Parties should engage well in advance to agree an approach and the process should be highly collaborative.
Part 2 of this series focuses on decarbonising the existing building stock, another critical focus for achieving net-zero in the UK's commercial building stock.