“Green” Leasing of Irish Commercial Real Estate

This article briefly considers the quiet revolution in “Green Leasing” of commercial real estate in an Irish context.

As of 2022, the ‘green premium’ that sustainability certified buildings generate over their peers (and conversely the ‘brown’ discount applying to outmoded offerings) has become an accepted and quantifiable reality in this jurisdiction[1]. This appetite for sustainability is felt keenly in the funding sphere, with capital drawn to the development of new schemes as well as the retrofit and refurbishment of existing stock to Environmental Social Governance (ESG) standards as lenders come to realise the implications of sustainability for the value of the security backing their debt investments. While the focus in this area tends to fall on high-profile office developments in particular, in the commercial real estate sphere the importance of sustainability is also being felt in the industrial sector, with CBRE noting that logistics operators in particular are seeking to incorporate renewable power sources such as solar panels and charging points for electric vehicles as they confront the challenges brought by climate change to transport and the supply chain. The retail sector has also begun to embrace ESG, with Savills reporting that M&S have been implementing green leases across its portfolio[2].

International certification initiatives in ESG such as Leadership in Energy and Environmental Design (LEED) and Building Research Establishment Environment Assessment Method (BREEAM) (the UK equivalent) come with an expiry date and must be maintained and renewed.  To ensure the maintenance of ESG certifications at a premises let by a landlord to an occupational tenant, a collaborative relationship is required to share information and costs attendant on maintaining the green status of the building.

What then are the emerging themes of ‘green’ commercial lease provisions themselves?  A green lease is simply a commercial lease which contains additional clauses providing for how a premises is to be occupied, operated and managed in a sustainable way. At the level of guiding principles, a green lease may contain a declaratory statement by Landlord and Tenant acknowledging their mutual responsibility to the climate and posterity and undertaking to work together to limit emissions and use resources economically.  A typical green lease will provide for digital metering of utilities allowing for data collection on energy use/efficiency, and further specific commitments for further energy saving, waste reduction and water efficiency.

Ongoing dialogue and consultation will be a focus of the green lease provisions, with designated contacts appointed to agree, monitor and expand sustainability goals over time, due to the organic and evolving nature of sustainability practice. A particularly interesting area of concern for green leasing agreements is the governance of works to the building going forward, whether in the course of Tenant works or future development by the Landlord. Landlords may press for explicit rights to veto requests for consent to works which do not meet the sustainability goals agreed to by the lease parties, or to otherwise consult extensively before and during the works to ensure that the works are implemented sustainably without causing unreasonable economic hardship to the Tenant. Likewise, the Landlord’s right to undertake works to enhance energy efficiency, water use etc. must be balanced against cost (particularly where that cost will ultimately be borne by tenants) and impact of the works themselves on the Tenant’s use and enjoyment of their premises.

As well as imposing positive obligations on the parties, the green lease may contain negative covenants, for example on the tenant not to do anything which would undermine certifications achieved for the building (whether LEED or otherwise) as well as positively incorporating the maintenance and renewal of sustainability focused infrastructure as part of their repair and yielding up covenant

An important consideration in integrating these provisions into commercial leases in Ireland will be that the obligations on the Tenant and/or the Landlord are set out in as much detail as possible. This will avoid a scenario in which provisions are left open to dispute and found to be “void for uncertainty” by the courts. This should not however preclude the parties from setting out their intentions in a way that allows flexibility to choose the green option where the costs of this are not prohibitive.

More often than not, the green alternative will, for now at least, incur a premium in cost over the status quo, and the parties will need to agree a framework for how much of a premium they are willing to countenance, and who will bear that cost. A lot will depend, equally, on the context of the letting – for example whether the tenant is taking a full repairing and insuring (FRI) lease of an entire building (under which the tenant is responsible for repairing and maintaining the entire structure and all services etc.) or a tenancy of part only of a multi-let building with multiple tenants and services to shared common areas where overall responsibility for the structure of the building rests with the Landlord.

Conclusion

While green leasing in Ireland is still in its infancy compared to international peers, adoption of green provisions in commercial leases has undergone a rapid expansion at the beginning of this decade and adoption is likely to continue apace as new office industrial and retail developments come on stream as well as the proliferation in the retrofitting of existing buildings to sustainability focused standards. Lawyers must adapt to the new reality and ensure that the requisite structures are in place in the lease agreement to facilitate a ‘sustainability partnership’ between landlord and tenant throughout the lease term.

How we can help

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Keith Doyle in our Real Estate Department (kdoyle@bhsm.ie / +353 (0)1 440 8308).

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.

[1] https://www.cbre.ie/en/research-and-reports/cbre-ireland-annual-outlook

[2] https://www.savills.co.uk/blog/article/283209/commercial-property/in-plain-english–green-leases.aspx