We are now approaching the end of another year in which ESG has continued to move up the agenda for decision makers in the property sector. It is therefore opportune to reflect on where the Irish market stands in relation to green lease clauses more generally.
In our experience, the majority of stakeholders in the Irish commercial property market are becoming more familiar with green lease clauses, their content, and their use cases.
It remains the case that the most common green clauses in commercial leases are co-operation and data sharing commitments. These have been a feature of the market for some time now. Most landlords will insist on a commitment from the tenant to share data relating to its use of the building, particularly energy consumption.
The fact that data sharing provisions constitute a baseline expectation in relation to green lease clauses is reflected in the most recent update to the City of London form of certificate of title (the London certificate) which was published in May of this year. The London certificate assumes that the parties to a lease have agreed to share data relating to the environmental performance of the property (subject to keeping the data confidential). Interestingly, in the guidance notes the authors refer to this being “regarded as perhaps the most important and regularly encountered green lease provision.”
It is notable that for now the authors of the London certificate have not categorised any further green lease provisions as being critical from a lender’s perspective. This in our view is also an accurate reflection of the Irish market, where more sophisticated green lease provisions remain open to negotiation.
As reported earlier this year, the Chancery Lane Project (CLP) have now published a suite of green lease clauses for use in Ireland. The CLP clauses are extremely comprehensive and cover a range of potential commitments ranging from the simple promotion of co-operation between landlords and tenants through to sustainable and circular economy principles in repair covenants and beyond. However, they cater for such a broad range of situations and permutations that they should not be adopted wholesale in any given lease and careful consideration is required around what is appropriate in a particular set of circumstances.
In a market where execution within tight time frames is critical, it is not in the interests of either party to spend time negotiating provisions that are neither of relevance nor benefit to the parties involved. It is therefore important that both landlord and tenant consider the specifics of the transaction and their respective ESG objectives at an early stage, taking the advice of the relevant stakeholders involved in order to identify what green lease provisions may be appropriate beyond data sharing.
Factors for consideration
There are many factors to take into account when trying to determine which clauses are important. Some of these can be summarised as follows:
The parties’ respective sustainability targets: Green lease provisions can be easier to negotiate where the parties’ sustainability targets are aligned. Landlords may be focussed on items which preserve or enhance the value of the building and / or those which are requirements of their debt funders, e.g. maintenance of the building’s energy or sustainability rating. Tenants, on the other hand, may be more focussed on reduction in energy costs and measures which achieve higher environmental standards without increasing overall operating cost. The closer the parties’ objectives are, the easier it is to reach consensus when it comes to drafting.
Regulatory requirements: These are of critical importance to the way the asset is held and managed. For example, a landlord may hold an asset in an Article 8 or 9 fund (pursuant to the Sustainable Finance Disclosures Regulation) and be required to promote environmental characteristics or have sustainable investment as a core objective as a result.
Policy requirements: Similarly, policy requirements are of critical importance to certain entities. For instance, state bodies are required under the Irish Government’s climate action framework to reduce CO2 emissions by 51% by 2030. Where such bodies are letting space, this will impact on negotiations with landlords around expectations and requirements for how the building is to operate and the parties’ respective commitments in that regard.
Nature, age and location of the building: Certain environmental commitments will make sense in the context of a new Grade A office building with a green building certification which will not work for an older asset. For instance, the green provisions in a new build may be focussed around issues such as restricting tenant alterations which will adversely affect the buildings sustainability certification. By contrast, in a letting of an older building, different considerations might be more relevant e.g. whether and how the landlord might access building to carry out environmental upgrades with the tenant in situ.
Duration of the commitment: It is important for all parties to bear in mind that the inclusion of green lease provisions is not a “point in time” consideration – these clauses will continue to bind the parties for the duration of the lease, which may last ten years or longer. In this context both parties need to be cognisant of striking the right balance and futureproofing to the extent possible.
The above considerations are clearly of relevance on a letting of new space but may also arise on the renewal of an existing letting. It is currently untested as to whether the Irish courts would require a sitting tenant to accept a landlord’s standard green lease provisions on a renewal and, in that context, negotiation of these provisions is for the time being likely to occur in that context also.
In any commercial lease negotiation, it is of critical importance to consider green commitments from the outset. Deals are signed with the least friction where ESG provisions are dealt with in detail at heads of terms stage, rather than being added to legal documents mid-negotiation. It is important in this context to get the input of the various stakeholders involved from the outset – not just the lawyers but also agents, fund managers etc. The parties should avoid generic clauses and ensure that the negotiation of green lease provisions is focused and reflective of the specific asset and the parties’ requirements.