Source: Howes Percival
A green lease is when there are clauses in a lease or supplementary lease document that help to improve the environmental and social impact of a building’s performance.[i] Green leases tend to be used for commercial properties (especially offices) rather than residential properties.[ii]
Sustainability measures that could be included in a green lease are those related to energy efficiency, such as maintaining an Energy Performance Certificate (EPC), water efficiency, and waste management. Green leases can also require the use of a benchmarking tool to certify building sustainability like BREEAM or LEED, or they can provide support for low carbon retrofit. Whilst there is no standardised way to classify a green lease, what is required is a commitment to sustainability and the sharing of sustainability data by both the landlord and the occupier.[iii]
A memorandum of understanding is a more lenient version of a green lease.[iv] It is a non-legally binding agreement between the tenant and the landlord about managing a property's environmental impact. It can therefore be amended more easily and put into action quicker.[v]
Green leases deal with the split incentive problem between landlords and occupiers. For example, a short-term occupier is not incentivised to invest money into improving the property's energy efficiency if they will not receive all the benefits due to a long payback time. On the other hand, a landlord is not incentivised to improve the energy efficiency of their property if they are not the ones paying the utility bills.
There are a range of benefits that green leases can bring. Firstly, lower operating costs due to increased efficiencies are attractive to tenants because it saves them money. There is mixed evidence as to whether better environmental performance creates a sustainability premium, but some sources suggest that green leases increase rental value.[vi] For example, rents are 5.6% higher for LEED-certified office buildings than for non-certified ones.[vii]
Secondly, green leases are beneficial for ESG reporting. Sustainability and reputation are important in the property sector. Both landlords and occupiers can mention the improved environmental performance or green lease in their ESG reporting. Companies that occupy more sustainable buildings may be able to hire and retain employees who have shared environmental values.
Thirdly, green leases can help mitigate risk. The number of green leases will likely increase in the future because of changing national climate policy and more businesses adopting net zero strategies and new ESG policies. Companies that future-proof their businesses now through green leases will help to protect themselves against climate change transition risks in the future.[viii]
Most important are the environmental benefits of increased energy and water efficiency and improved waste management. Operational emissions (the energy used to heat, cool and light buildings) account for 28% of all global carbon emissions.[ix] Globally, we must increase energy efficiency by 4% every year to reach net zero by 2050.[x] Green leases are one way to spur energy efficiency in the built environment.
Improving energy efficiency will also help landlords to comply with regulations such as the UK’s Minimum Energy Efficiency Standards (MEES). Since April this year, non-domestic landlords have been required to obtain an EPC rating of at least E to privately rent their property.[xi]
Figure 1: Adoption of green leases in the Asia Pacific
JLL surveyed 340 sustainability leaders across the Asia Pacific and found that up to 42% of occupiers and large developers have signed green leases.[xii] JLL’s report on the region's green leases clearly shows that green leases are the future. 65% of the professionals surveyed believe that green leases will replace conventional leases by 2025.[xiii] In the future, social aspects will likely be included in green lease clauses. However, currently, data sharing (72%), energy efficiency (70%), and waste management (65%) are the top clauses included in green leases.[xiv] Therefore, there will need to be some thought into how social considerations, like community engagement and uplift, can be incorporated more commonly into green leases. JLL also found that legacy building infrastructure, increased rental costs, and complex administrative and legal processes are the top three barriers for green leases to overcome.
Gemma recently graduated with a degree in International Development. She is currently studying for an MSc in Sustainable Urbanism, which examines urban planning and urban design through a sustainability lens. “I’m passionate about addressing sustainability challenges in a holistic and pragmatic way. Zero Carbon Academy's diverse range of services targets many of the areas that need support if we are to transition to a liveable future. I’m excited to see the impact that the Academy makes.”