Green leases: Time to employ circular reasoning

I am negotiating heads of terms to take a lease of a floor in a recently developed building which has excellent green credentials. The draft heads of terms include the following statement: “Both parties will apply circular economy principles to any work they undertake.” That gives rise to a number of questions.

What are circular economy principles?

The phrase “circular economy” refers to the methods by which materials are used and disposed of in society.

For many years, our model for material usage has been linear in nature – raw materials are mined, farmed or extracted, then manufactured or refined for a single purpose before eventually being discarded when they become redundant. This historical culture of single-use materials is not conducive to the promotion of a greener built environment, leading many stakeholders to search for an alternative to this unsustainable practice.

Enter, the circular economy.

A circular economy, in contrast to its linear alternative, focuses on maximising the retention of materials at their highest value, before they are then reused, repurposed or recycled, rather than rejected. This principle (in its ideal) aims to extend the life cycle of construction and other materials indefinitely, eliminating unnecessary waste.

How might circular economy principles appear as lease obligations?

Growing industry concern over embodied carbon, waste generation and climate resilience has prompted serious consideration of adopting circular economy principles as market standard in commercial leases, as evidenced by their inclusion in the BBP’s Green Lease Toolkit and the Chancery Lane Project’s sample clauses.

While the ultimate goal of a circular economy is to maximise the reuse of materials and minimise waste, it is unrealistic to expect the industry to achieve this ideal overnight. Consequently, the most common embodiment of these principles in lease obligations comes in the form of an obligation on the landlord and tenant to prioritise the use of sustainably sourced materials when complying with their repair, yielding up or servicing obligations.

Parties may be required to carry out works or repairs with materials from a hierarchy of sustainable sources, starting with the most sustainable option and working down through other sources where the prior (more sustainable) option is not feasible. An example hierarchy could be as follows:

• Reused or repurposed materials, being materials or components that are not waste and can be used for the same purpose for which they were conceived;
• Reclaimed materials, being materials or components that have been removed from another location and can be reused without substantial modification;
• Sustainable materials, being materials that have been produced in a way that minimises embodied carbon, have been produced from sustainable sources and are recyclable or reusable themselves;
• Recycled materials, being materials which have been reprocessed into products, materials or substances for their original or other purposes; and
• Recyclable materials, being materials that can be reprocessed into products, materials or substances for their original or other purposes.

Circular economy principles may also be applied to the tenant’s reinstatement obligations, by limiting the requirement to reinstate alterations where the materials can be reused or repurposed by the landlord or future tenants. Examples of such works include the erection of partition walls, improvements to HVAC equipment and the installation of solar panels or electric vehicle charging points.

As these principles primarily relate to the carrying out of works, the obligations around them may also appear in an agreement for lease or licence for alterations. Landlords and tenants may also agree separate obligations to comply with waste management strategies or other incentives to reduce waste produced from the premises, the building or the estate.

Will agreeing to adopt circular economy principles prevent me from being able to carry out alterations?

No. Agreeing to adopt these principles should not stop tenants from carrying out alterations, but they will need to put careful thought and effort into sourcing sustainable materials.

The principles are not always easy to put into practice, so it is prudent to agree that the obligations will only apply where it is reasonable to assess the sustainability of the relevant materials or where compliance does not materially increase the cost of carrying out the relevant works.

Landlords and tenants who agree circular economy drafting in their leases should ensure that they are comfortable (and confident) that they can source relevant materials from at least one of the categories of permitted materials, or that there is suitable provision to deviate from this list in emergencies or with the approval of the other party.

Should I agree to adopt circular economy principles in my lease?

This is entirely a question for the landlord or tenant’s own ESG criteria, targets, capabilities and appetite.

Most sample obligations put forward by working groups such as the BBP mark an exciting and significant change in approach, but they are not yet widely adopted in the market. Arguably, there is little societal and environmental value in developing market-leading, state-of-the-art green developments if they are not correctly preserved in use, and the adoption of circular economy principles by their owners and occupiers could be key in ensuring these developments’ future attainment of green credentials. The same can be said for existing stock, as encouraging small changes in material resourcing could be pivotal in the steady improvement of lower-performing assets.

Nevertheless, enshrining these principles in lease obligations also brings the risk of damaged relationships if they are not complied with, and at least a hypothetical risk of forfeiture.

This is particularly concerning for SMEs, which may find it more difficult to leverage their supply chain in a way that allows them to comply easily with these obligations or to justify the likely increase in costs that comes with procuring materials from more sustainable sources. The same can be said for larger organisations and occupiers, which may be tasked with wildly different obligations across a large portfolio of sites and landlords while such policies are gradually adopted into their leases.

Published by Estates Gazette.