The concept of the green lease in many ways epitomizes the radical shift in thinking in real estate. What might have seemed simply gimmicky or eccentric as little as a year ago is close to becoming a serious option for landlords and tenants. And interest is not limited to the fringes of the market. Prominent developers, such as Hammerson and Prupim, the real estate arm of Prudential, are in the green lease vanguard.
The move towards some codification of sustainable practices in a green lease shows how seriously many of the leaders in real estate are addressing environmental issues. Although many are keen to trumpet their commitment to green practices, it is still difficult to put a finger on exactly what has been done and the impact of these efforts. Putting resources into developing green leases is in effect a way to quantify a company’s green credentials beyond the rhetoric.
Pioneered by the Australian government and brought into widespread use in 2006, green leases have only just started to appear elsewhere. In Australia, where the government is the largest tenant of commercial property, natural resources – water for example – are often scarce. Green leases were developed to help the government conserve resources and inhabit buildings in a more environment-sensitive way. Australia has developed a green lease schedule (GLS) and policy requires that every time a new lease over two years is signed on a building of more than 2,000 square metres, the GLS should form part of the lease, if possible.
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"Green leasing will come in quite slowly, just as it did in Australia, before people accept it as something they can live with"
Paul Jayson, DLA Piper |
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Green leases include a legal basis for monitoring and improving energy performance. Mutual contractual lease obligations for tenants and owners aim to achieve resource efficiency targets – in areas such as energy, water and waste – and to minimize environmental impacts. Breach of environmental covenants could result in a fine, for example, for either party.
One of the first UK green leases is being negotiated between Moto, a large motorway service area operator, and a hotel chain. Moto is keen to get as a tenant a hotel operator that will run along green lines and on an environmentally sustainable basis.
"What’s unusual, what I thought we would see is the big investment houses and asset managers leading the change, saying we want green leases in order to have a certain grade of investment stock," says Paul Jayson, partner at DLA Piper in London. "However, in this particular case, it’s being done more for corporate social responsibility reasons and public perception. The landlord, who is a service station operator, wants to be seen as being sustainable. It has nothing to do with the bottom line."
It’s ironic that Moto, a company in the business of catering to car travellers, is the one pioneering green leases beyond Australia. And, says Jayson, the company is certainly not doing it for a tangible economic gain. Part of the motivation is a belief that being perceived as green might help it in future negotiations with planners.
"They’ve seen an area where the market will be moving or should be moving," says Jayson.
Heavy promotion
As green leases go, Moto’s would be classified as light green. The company hasn’t forced a lot of provisions on the tenant, reports Jayson. The lease includes quite a few provisions about recycling, solar panels and the use of greener energy sources.
"In terms of the precedent on green lease that we’re working on, it’s nowhere near as bold as it could be," says Jayson. "Green leasing will come in quite slowly, just as it did in Australia, before people accept it as something they can live with."
In the UK, the concept of green leasing is being heavily promoted by the Better Buildings Partnership (BBP), a unit of the London Climate Change Agency (LCCA) backed by the mayor of London. The BBP, which counts British Land, LandSecurities, Hammerson and Hermes’ property arm among its membership, is drafting a green lease schedule that it hopes will become best practice for green leases developed specifically for London. The BBP schedule will be approved by the members and used by them where possible in lease negotiations.
"One of the main stumbling blocks at the moment is the relationship between landlords and tenants," says Tatiana Bosteels, senior officer at the LCCA, who oversees the BBP. "They haven’t been able to come down from what I call the blame game. They haven’t been able to put into place good incentives for either party to take action."
On the one hand, explains Bosteels, the tenants tend to have medium-term leases with very little incentive to invest in retrofits. In terms of service management, they have very little incentive to take action because they have a fixed service fee for the building. On the other hand, the landlords haven’t seen any returns in terms of yields for the building if they provide more sustainable input and once the lease is set they have no incentive to invest capital into retrofitting the buildings or to negotiate to change the service agreements with the tenants.
"The green lease is a way to include from the very beginning a much more proactive partnership between the tenant and landlord that gives an incentive to both parties to improve the sustainability of the building at the time," says Bosteels. "It’s a very important element that will break down one of the key barriers from the legal perspective which is blocking capital investment and sustainable service improvements."
Pressure is also coming from the UK government, which believes that buildings are a big source of carbon emissions. Accordingly buildings have been the target of new legislation and regulation to encourage increased energy efficiency and sustainability. Once energy performance certificates (EPCs), which provide an A to G rating for properties to reflect their energy efficiency and carbon emissions, become mandatory for commercial property owners, some believe green leases will become more common.