The Revamped BBP Green Lease Toolkit - 10 Top Takeaways Part 2

Following the launch of the BBP’s revised green lease toolkit, Kieran Mitchell explores ten key takeaways from the toolkit’s suggested green clauses and concepts for landlords and tenants to consider.

In Part 1 of this series of insights, we explored five of the more predictable developments in the Better Buildings Partnership revised Green Lease Toolkit. In Part 2, we explore five concepts from the new Toolkit that were somewhat more progressive and may prove more controversial.

1. The dawn of the ‘Responsible Lease’ and the concept of ‘social impact’ clauses

One of the more significant and surprising developments in the revamped Toolkit is the inclusion of ‘social impact’ clauses, which extend beyond commonly accepted sustainability obligations and focus instead on the parties’ socio-economic responsibilities. 

The Toolkit acknowledges that there is no ‘one size fits all’ approach to incorporating socio-economic obligations into leases, so they should be flexible obligations that allow for changing social initiatives throughout the lease term. Some suggested obligations are the completion of regular social impact surveys, engaging with local businesses or school initiatives, promoting local employment opportunities, partnering with local charities for Christmas toy drives and complying with overriding diversity and inclusion policies. 

The Toolkit also provides sample drafting requiring the parties to ensure their employees (and the employees of first tier contractors or suppliers) are paid a Real Living Wage, with various levels of obligation. Such obligations appear to herald the dawn of the ‘Responsible Lease’, leaving what we think of as a ‘Green Lease’ as a mere precursor.

Whilst we have experienced examples of parties seeking to include social impact obligations in their leases, the concept of lease covenants extending beyond matters which directly touch and concern the building being occupied remain relatively novel. There is no doubt that many stakeholders in the real estate industry are keen to engage in socio-economic matters, but in the current economic climate it seems unlikely that parties to commercial leases will agree to write into their leases binding and potentially costly obligations to do so. Compliance with many of these obligations could also necessitate changes in the parties’ wider business operations, such as procurement procedures. Whilst it remains to be seen what reaction the market has to such issues, they may gain more traction if agreed outside of the lease in a separate side agreement or tenant handbook so that potential breaches are ringfenced.

2. Assessing environmental performance (EP) prior to alterations

New leases usually prohibit alterations that adversely affect the EP of the premises, however the new Toolkit’s ‘light green’ drafting goes further than this. It prohibits any alterations until tenants have provided landlords with sufficient evidence to accurately assess any negative EP impact resulting from such alterations. If this approach is adopted in practice, it could require detailed assessments for all alterations including those permitted without the landlord’s consent or where no negative EP impact is expected. It could therefore operate as a back door fetter to relatively minor alterations.

3. The war on waste

One of the most noticeable developments in the new Toolkit is the greater emphasis placed on waste management. Various suggested clauses focus on the parties’ obligations to minimise landfill waste, to salvage waste (so waste is recovered, reused, repurposed, reprocessed or recycled) and to implement waste segregations systems. The level of detail included in the Toolkit’s sample clauses goes beyond what is commonly seen in leases and may be more appropriately covered in tenant handbooks.

The Toolkit also provides sample drafting to introduce circular economy principles into modern commercial leases. Circular economy principles require the parties to carry out works using methods and materials that minimise the use of new resources, waste, GHG emissions and embodied carbon by prioritising the sourcing of reusable, recycled or sustainable materials. Many industry stakeholders already take an active role in reusing and repurposing materials for works, but each entity’s ability to comply with such requirements is largely dependent on their own supply chain and most entities will need to factor in other considerations, including cost. The uptake of circular economy principles in leases would therefore require quite a significant change in practice and mindset.

4. Renewable energy

A key driving force behind improving the overall EP of the built environment is the supply of renewable energy sources to buildings. The new Toolkit recognises the importance of promoting green energy and provides options for ‘light’, ‘medium’ and ‘dark’ green obligations on the parties. Obligations in respect of renewable energy supplies are more frequently seen in leases of new developments as a means of maintaining exceptional energy performance ratings, but with the expectation of more stringent minimum energy efficiency standards in the future such obligations will likely become more common in leases of all property classes. Parties that include this type of obligation in their leases must however be clear as the extent of the ‘green supply’ that they are expected to procure.

The Toolkit’s ‘light green’ option requires electricity supply agreements (ESA) using a tariff from either a ‘Green Supplier’ (an electricity retailer that purchases 100% renewable energy or a generator of 100% renewable energy) or from a supplier of energy that purchases unbundled Renewable Energy Guarantees of Origin (REGO) to support their green tariff. REGO certificates are granted in respect of each MWh of renewable energy that is produced, but certificates are not intrinsically linked to the energy they are issued in respect of and can therefore be sold on a secondary market. Consequently, suppliers of non-renewable energy can purchase REGO certificates to certify their non-renewable energy supply as a green supply. Parties need to be aware of these distinctions, especially where there are planning or other constraints (such as green finance obligations) in respect of the building’s energy supply.

The Toolkit’s ‘medium green’ option requires ESAs with Green Suppliers only. Meanwhile the ‘dark green’ option requires energy supplies that are from 100% renewable energy and provides further procurement obligations.

5. Considering EP on reinstatement

A helpful development for both parties in the new Toolkit is the recognition that a blanket requirement to reinstate all alterations at expiry of the term can lead to unnecessary waste and cost, especially where those alterations have improved the EP of the premises. The suggested drafting on reinstatement stipulates that all alterations are reinstated unless the landlord gives notice that certain alterations should not be reinstated. The drafting requires landlord to consider any adverse impact that reinstatement may have on EP (disregarding any waste generated by the removal) unless reinstatement is required due to the Landlord’s intentions for the use or re-letting of the premises. 

The Toolkit’s ‘light’, ‘medium’ and ‘dark’ green options give varying degrees of detail as to the tenant’s obligations in respect of waste management and data collection during reinstatement.

Whilst this is a positive change for tenants who face difficult negotiations on reinstatement carve outs, the Toolkit’s suggested drafting does not require landlords’ requests for reinstatement to be reasonable. This means that control over reinstatement requirements remains largely with landlords.  

The suggested clauses also provide an opportunity for landlords to require that certain alterations are left by the tenant. Historically, tenants have been keen to avoid the cost of stripping out at the end of the term however we are seeing an increasing number of occupiers preferring to remove as much of their alterations and additions as possible in the hope that they can be reused at other sites or disposed of sustainably, especially where the materials or plant are valuable.

Final thoughts

The revamped Toolkit provides excellent guidance on various environmental concepts and sample drafting that can be used by stakeholders as part of the negotiation process. Whilst there are certainly discrepancies between what is proposed in the Toolkit and the current market appetite, it signposts the industry’s green ambitions and it will undoubtedly help formulate the evolution of sustainability in the built environment.

If you need assistance with your green lease negotiations, please feel free to contact us.