ESG in Real Estate - Green Leases expert guide in United Kingdom

Yes, EPCs (and their associated Recommendation Report) need to be provided for both sales and lettings, but there are some exceptions. In England and Wales there are minimum requirements (known as MEES) for lettings (the EPC must be "E" or better), but there are again some exceptions. There isn't yet a minimum requirement (MEES) in Scotland, but this is currently being reviewed.

The rules on EPCs and MEES apply to both commercial and residential properties, but there are some differences between them.

For more information on EPCs and MEES, see our interactive flowchart: the-impact-of-mees-flowchart (cms.law)

This is largely governed by the planning process. Planning conditions and s.106 obligations often have ESG requirements (e.g. requirements that the building meets a BREEAM standard, to have a travel plan, a to contribute to local infrastructure projects and to recruit locally in respect of construction workers). 

 New developments need to be able to demonstrate that they have a net gain in terms of biodiversity - for more information on this, see here:

Biodiversity Net Gain comes into force - what does it mean for you? (cms-lawnow.com)Biodiversity Net Gain – Where are we now? (cms-lawnow.com) Planning for the Environment - The Environment Act 2021 (cms-lawnow.com) Planning Ahead with CMS

The statutory provisions do not apply in Scotland, but similar requirements are being applied through policy.

Building Regulations in England and Wales (or Scottish Building Standards, in respect of Scotland) also impose statutory guidance on energy efficiency requirements for new buildings.

Some green lease provisions are generally included in commercial leases. This is not a legal requirement and their inclusion is market driven.

Wording is often lifted and adapted from the BBP Green Lease Toolkit. This toolkit was updated in January 2024 (Time to 'green' your leases? Revamped Green Lease Toolkit released (cms-lawnow.com). It includes the following areas as the 10 "Green Lease Essentials":

• Cooperation
• Building Management/Sustainability Group
• Sustainable Use
• Data Sharing & Metering
• Extending Landlord right to do works
• Tenant’s Alterations
• EPCs
• Waste (Landlord & Tenant)
• Re-instatement (yield up)
• Renewable Energy

Of the above, the renewable energy requirement is the main addition which is unlikely to be seen in leases before the new green lease toolkit was launched. As for the other provisions, they are fairly common, but some may appear in other documents, such as tenant fit out guides or handbooks, rather than the leases themselves.

The market drive for including such provisions can be both landlord and tenant led. In particular, the data sharing provisions are seen as important for both landlord and tenant reporting requirements and landlord benchmarking (e.g. GRESB). Banks offering green loans may also expect to see some green lease provisions.

Green lease provisions are not generally seen in residential leases.

There is no established practice that institutional investors and banks/other financing institutions require green lease drafting, so the cases where some institutional investors and banks and other financing institutions require such drafting are rather exceptions to general practices. In addition, the lack of green lease provisions is not reflected in our standard due diligence reports on an acquisition or refinancing.

It would be very unlikely for a landlord to forfeit (irritate) a lease because a tenant has not complied with a green lease provision.

They are often drafted as aspirations and targets, rather than specific obligations. Therefore, establishing breach of contract would be difficult. However, if breach of contract were established, it would be difficult to establish loss for a damages claim for breach of contract for either landlord or tenant. Therefore, green lease provisions remain largely unenforced.

The exceptions to that would be the provisions that refer back to particular statutory provisions (e.g. EPCs and MEES or planning requirements). These would be enforced by the relevant authority (the Local Authority for EPCs, MEES and planning). However, in relation to MEES (applicable in England and Wales only), there have been concerns about the Local Authorities' lack of resources to enforce MEES (MEES - why are local authorities failing to enforce? (cms.law)). Where there is breach of a statutory requirement, contractual losses may be easier to establish, in terms of enforcement for breach of green lease provisions.

Some landlords have discussed introducing incentives to encourage sustainable behaviours, such as rent reductions based on KPIs. However, these are rare.

EPCs are statutory and are therefore required. Otherwise, there are no statutory requirements, but through the planning system, requirements to meet particular standards may be included as planning conditions.

Sustainable ratings which are common in commercial buildings are BREEAM and NABERS. This is likely to apply to new builds, but also to substantial refurbishments.

For residential buildings, there is no market standard, but the Passivhaus standard is one which is available.

WELL standard covers the "S" of ESG and considers a building's impact on the wellbeing of its occupants. This is becoming more common in commercial buildings.

In the commercial market, the drive for standards comes from developers/landlords and occupiers. This is particularly true of main office HQ lettings.

In the commercial market, for new builds, the agreement for lease (between the landlord and tenant) will include obligations on the landlord/developer to meet the relevant standard. NABERS looks at the building once it is operational and therefore requires some cooperation from the tenant. Appropriate drafting is therefore usually included in the agreement for lease and/or lease. The new BBP Green Lease Toolkit includes specific wording for NABERS - Standards | Better Buildings Partnership

Yes. Even at a small scale, the generation, transportation (“distribution”) and supply to premises of electricity are regulated activities under the electricity sector specific regulatory regime. In essence, this can be dealt with in two ways – either operating under a licence for performing these activities or operating within an “exemption” from the need for a licence. Generally in the context of on-site electricity systems parties will look to operate within a licence exemption as, particularly for supply or distribution of electricity, the commercial and administrative impacts of operating under a licence would preclude a viable project.

Contractually, where the occupier of the premises is not the same entity as the entity that owns/operates the relevant electricity generation installation, power purchase arrangements generally need to be put in place for the sale and purchase of the electricity. This would apply, for example, where the landlord owns/operates the generation and the tenant is consuming the relevant power – or where a third party energy company owns/operates the relevant generation.

Arrangements in respect of the premises grid connection permitting on-site generation (and often allowing for the “spill” of electricity that is not used on-site for sale onto the grid) also need to be put in place together, as you would expect, with lease or licence arrangements for the relevant location of the installation and arrangements for the procurement/construction/installation and ongoing operation of the relevant installation.  

For new developments in England and Wales, developers need to be able to demonstrate that they have a net gain in terms of plant biodiversity - for more information on this, see here:

Biodiversity Net Gain comes into force - what does it mean for you? (cms-lawnow.com)Biodiversity Net Gain – Where are we now? (cms-lawnow.com) Planning for the Environment - The Environment Act 2021 (cms-lawnow.com) Planning Ahead with CMS

The statutory provisions do not apply in Scotland, but similar requirements are being applied through policy.