Landlords should champion green leases to help their buildings get to net zero

With a building’s value increasingly interwoven with its energy efficiency, building owners need robust action plans to cut their carbon emissions. 

But they can only achieve so much on their own. While buildings can be designed and modified to meet rigorous sustainability criteria, the results are largely lackluster if they’re not operated in a sustainable way.

With tenant usage such a critical part of achieving net zero operations, owners don’t just need to have their tenants on board; they need them to be active partners working towards common goals. 

It’s a key reason why green leases are rapidly growing in popularity. Around 42% of investors already use green leases, according to JLL’s 2021 Responsible Real Estate study, with a further 37% planning to have them in place by 2025. 

Their scope is also evolving to become more than a simple list of obligations around energy efficiency, waste and water. Forward-thinking landlords are adopting more collaborative green leasing 2.0 models that ensure buildings comply with evolving legislation while improving resilience to growing climate risks, tackling embodied carbon, outlining the use of carbon credits and supporting health and wellbeing.

These new green leasing models need to become mainstream to support real estate’s progress to net zero. 

Sharing costs and benefits

In the global push to net zero, many buildings will require some form of retrofitting in the coming years to make them more energy efficient and reduce their reliance on fossil fuels. For landlords this will be essential to avoid brown discounts, issues with liquidity, more expensive financing and penalties for non-compliance.

According to JLL’s Retrofitting Buildings to be Future-Fit research, looking at 10 major cities in Europe and North America, 90% of office stock is over 10 years old, and even offices completed just over five years ago are unlikely to comply with future energy efficiency standards. 

This requires long-term planning to bring them up to expected – and increasingly required – standards. While deep retrofitting across an entire building may need to be done during vacant periods, other works can be done floor-by-floor with some tenants still on the premises. It’s where co-investment into building upgrades, as outlined in the responsibilities agreed within green leases, becomes a possibility, especially for longer-term tenants who will benefit from lower energy bills and operating costs, not to mention a reduced carbon footprint.

Enhanced collaboration can take other forms. For landlords to provide the right decarbonization solutions, tenants need to collect and share data. If landlords are covering the capex of a NZC refurbishment, tenants could agree to sign lease extensions so both benefit from the investment, and landlords could share NZC assessment results, getting buy in and accountability from their tenants. 

In addition to delivering on net zero goals, the green leasing 2.0 model could focus on wider aspects of sustainability such as creating healthier spaces for tenants. Introducing more greenery inside and outside buildings can promote wellbeing while better ventilation and air quality can support tenant health.

We’re increasingly seeing such measures translate to better tenant satisfaction which in turn makes it easier to attract and retain the growing number of companies who have made their sustainability goals a priority.

In fact, nearly half of 4,000 respondents from across commercial real estate and construction said that green buildings command premium rents in an August 2021 survey from RICS and the World Built Environment Forum.

Getting the most from green leases

For now, green leases are optional but as metropolitan and national governments tighten sustainability regulations, more countries could follow France’s lead where green lease clauses are mandatory for all large commercial leases. These require all parties to share data, undertake regular reviews of a building’s environmental performance of a property, and commit to a program of improvements to the environmental and energy performance. 

So what does a successful green lease look like? 

• Set measurable goals - Effective lease clauses identify objectives with corresponding KPIs that provide both landlord and tenants with clear, measurable targets they need to meet. Consider putting incentives in place to encourage achievement of environmental goals. For example, the tenant could get a lease break if they achieve certain energy cost savings. 

• Assemble the right team - When a green lease is written, collaboration needs to begin early in the process. Sustainability experts, property managers and operations teams are best placed to provide insight on what is achievable, understand expectations and identify their role in achieving goals. They should be involved from the start so the principles of green leases aren’t left to the attorneys who are often instructed to simplify or divert risk.

• Make it a win/win – Green leases should support progress towards common goals. articulate the benefits of green leases to both parties. For landlords, properties that boast strong sustainability credentials are in high demand among sustainability-conscious tenants and better retain their value than those that fall short. For tenants, sustainable buildings can help them meet their own net zero carbon objectives, reduce energy expenses, and recruit and retain employees more easily. 

• Consider a separate agreement – Traditionally, green lease clauses are included within the actual lease agreement. However, as they grow in scope and complexity, they may deserve a document of their own to outline intentions of the green initiatives and set up a clear governance structure that enables constant engagement. Given the life of a lease can extend ten or even fifteen years, the sustainability landscape is likely to change dramatically over that timeframe and ongoing collaboration to revise clauses accordingly will be crucial.

With building performance now being scrutinized like never before through enhanced sustainability reporting and pressure from shareholders, building owners need to implement plans that reduce carbon emissions. And to really show progress towards net zero targets, they need to work in closer collaboration than ever with their tenants. 

For more information about incorporating green leases into your standard operating procedures or negotiating green lease clauses, download our latest research on green leases or contact our sustainability and leasing experts.

Contributors:

Kirsty Draper, Head of Sustainability for UK Agency, JLL