Green leases, which incorporate sustainability obligations for both landlords and tenants, offer many advantages but also come with their own challenges, according to leading property consultancy Fisher German.
Ishfaq Hussain, a partner in the firm’s lease advisory team, said that while the UK government is consulting on reforms to the Energy Performance of Buildings regime and the final changes to Energy Performance Certificate (EPC) requirements have yet to be confirmed, the long-term benefits of green leases often outweigh the initial hurdles for both commercial landlords and tenants.
The complexity of green leases can be a significant hurdle.
For landlords, these leases are often more intricate than traditional ones, requiring detailed negotiations to align sustainability goals and responsibilities.
Tenants may find that this leads to longer negotiation periods and the need for legal and sustainability expertise.
Maintaining the standards set out in green leases can be challenging for landlords, requiring ongoing monitoring and compliance efforts, while tenants must adhere to the sustainability practices outlined in the lease, which can involve regular reporting and adjustments to their operations.
Minimum Energy Efficiency Standard (MEES) Regulations are increasingly impacting the commercial property market in England and Wales.
These regulations extend beyond the basic rating levels required at the time of letting or leasing, influencing lease renewal negotiations, alienation, dilapidations, and rent reviews. The EPC ratings now directly affect both rental and capital values.
An EPC registered for a property is likely to be inaccurate if the assessment is old. Generally, the older the assessment, the less likely it is to reflect the current rating of the property. This inaccuracy can be attributed to developments in EPC methodology.
In June 2022, a significant change in EPC assessments occurred, correlating with the 'carbon factor', which measures the carbon emissions created by the amount of electricity used.
This change resulted in a reduction of over 50 per cent in carbon emissions associated with grid-supplied electricity.
Consequently, properties with primarily electrically powered heating/cooling systems have seen EPC outcomes improve by 1-3 grades, while those with gas/oil-fuelled systems have seen their ratings worsen by 1-3 grades.
For landlords with gas-fired heating systems, improvements typically involve significant system replacements.
This trend is expected to continue, with the government's target date set for April 2030.
Lease events, particularly those from the early 2000s, are most affected by EPC changes. Tenants may dispute the validity of outdated EPCs, especially if the property uses gas heating, potentially complicating lease negotiations.
One primary challenge for landlords is the substantial upfront investment required to implement energy-efficient upgrades, such as LED lighting, efficient Heating Ventilation and Air Conditioning systems, and smart meters.
These costs can be a barrier, especially for smaller property owners, and tenants may also face higher initial costs due to the need to comply with green lease requirements.
Despite these challenges, green leases offer numerous benefits.
They promote energy efficiency, leading to lower operating costs and enhanced property values for landlords. Sustainable buildings are more attractive to eco-conscious tenants, potentially increasing occupancy rates.
Tenants benefit from reduced utility bills and a healthier indoor environment, which can improve employee productivity and satisfaction.
Properties with green leases often see an increase in market value due to their sustainability features and lower operating costs.
For tenants, occupying a green building can enhance their corporate image and help meet their own sustainability goals.
Green leases also help landlords stay ahead of environmental regulations, avoiding potential penalties and ensuring compliance with sustainability targets.
Tenants can align their operations with environmental regulations and corporate ESG (Environmental, Social, and Governance) goals.
The UK government is currently consulting on reforms to the Energy Performance of Buildings regime, and the final changes to EPC requirements have yet to be confirmed.
This uncertainty can make it challenging for both landlords and tenants to plan and invest appropriately, as future regulations could impact property values and operational costs.
