Green leases in the context of the real estate market and ESG

17 November 2023 | Knowledge, News, The Right Focus

According to the Polish Green Building Council, the use or operation of buildings accounts for around 40 % of global energy consumption and 36 % of carbon dioxide emissions, making this a major factor in greenhouse gas emissions. The real estate industry is one of the world’s largest energy consumers and accounts for a significant proportion of total energy consumption.

In order to address this issue and steer Member States towards a green transformation, the European Union has adopted a number of legislative measures and policy initiatives related to environmental, social and corporate governance (ESG) issues.

One of the elements of this strategy is the creation of so-called green leases.

What are green leases

Green leases are standard leases with additional provisions on ESG issues.

The ‘green’ clauses are either included directly in the agreement, or are drawn up in annexes setting out the framework for parties working together towards the sustainable use of the property.

For many operating in this market, sustainability is already a key part of the business, and as a result green leases are becoming increasingly popular. However, such leases are not yet legally regulated in any way, and there is also no established standard for drafting such clauses.

In contrast, other European countries, such as Germany, the UK or France, already have standardised rules that can be used as a benchmark for green leases. Some governments also use various types of incentives to encourage parties to enter into green leases. This is the case in Belgium, for example.

However, it is clear that green leases are also becoming more popular in Poland. There are also many signs that such leases will become standard in the property market in the future.

The will of the parties and green financing

As there is no standard for green clauses, their content and insertion in agreements depends entirely on the will of the parties and their intention to cooperate. Practice shows that the approach to this issue varies widely.

Green clauses are usually drafted and included in the lease at the initiative of the landlord, i.e. the building owner. However, some tenants, particularly global corporations, have developed their own list of provisions that should or must be included in the lease, according to their group policies. This is largely due to the non-financial reporting requirements introduced by the CSRD as part of the implementation of the EU Green Deal.

Landlords, on the other hand, are keen to ‘green’ their leases. This is not only because of reporting, but also due to increased competitiveness and the possibility of obtaining so-called green financing linked to sustainability. This depends precisely on the use of green clauses in agreements, and property finance banks often specify ESG requirements and can refuse financing to those who do not meet them.

How green is your annex?  ‘Light Green’ vs ‘Dark Green’ clauses

In terms of binding force, two types of green clauses can be distinguished. These are light green clauses, which are basically just a declaration of the parties’ willingness to apply green clauses without imposing sanctions for non-compliance, and dark green clauses, which have the nature of obligations and impose specific responsibilities on the parties with the risk of sanctions for any non-compliance.

At present, it appears that in most leases the parties limit themselves to the light green variety. Perhaps this is because there is not yet a developed market standard for obligations relating to the sustainability of real estate, so that parties work out green clauses through dialogue rather than imposing them.

The most common green clauses in leases

As green clauses in leases are not common, their content may be specific to a particular industry, type of property or even region.

Typically, green clauses refer to provisions relating to ecology or sustainability. From our practice, it appears that the greatest attention is paid to the introduction of environmentally friendly practices and the promotion of measures to protect the environment.

Several main categories of green clauses are beginning to appear in leases. These are:

  • Green building certification – it has become almost standard in the commercial property market for a building to have a common energy certification such as LEED, BREEM or WELL. A green certification indicates that the building was designed and constructed with environmental criteria, energy efficiency, indoor air quality and other sustainability factors in mind.

Interestingly, in 2022, Poland had as many as 1,100 eco-buildings[i], making it the leader in Central and Eastern Europe in terms of property certification.

  • Reducing greenhouse gas emissions / energy efficiency – reducing greenhouse gas emissions/energy efficiency – green leases often include provisions for the use of energy-efficient solutions such as solar lighting, thermal insulation or low energy heating systems. In addition, landlords are increasingly carrying out energy monitoring and carbon assessments, requiring tenants to provide information on their water and energy consumption, waste generation or the data needed to produce a carbon footprint. This sometimes causes controversy among tenants who do not understand the basis for such an obligation. On the other hand, tenants often expect landlords to introduce eco-friendly solutions, such as the installation of charging points for electric vehicles, which may require large investments that are not included in landlords’ budgets. This is why dialogue and awareness of the mutual benefits of optimising energy consumption are so important.
  • Waste management / closed-loop economy – Green clauses aim to minimise the consumption of raw materials, reduce the amount of waste produced and maximise the use of resources. The most common provisions in this area are, of course, commitments by the parties to systematic and appropriate waste management and recycling. We also often see provisions encouraging the repair and maintenance of equipment or systems rather than their complete replacement, thereby promoting their long-term use. There are also leases where the parties encourage each other to use furniture and equipment made from recycled materials and to use local suppliers, which helps to reduce the environmental footprint by, for example, reducing transport.
  • Fit-out – although it has long been market standard to take the materials and equipment used in the fit-out of pre-owned premises into consideration, there is now an increasing tendency to regulate this issue in the lease. Depending on the particular situation, either party may want this, e.g. the tenant, if the landlord is preparing the premises for the tenant’s needs, or the landlord, if the tenant is the one who will be renovating or modernising the premises. The parties often stipulate in the lease that the contractors carrying out fit-out work must use materials that are considered to be environmentally friendly and energy efficient, taking into account a life cycle assessment. They also refer to various EU directives (e.g. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment) or to ISO standards (e.g. Type I environmental label as defined in ISO 14024). Landlords often indicate to tenants which materials are safe for health and the environment and which must or should be used, for example, when renovating a premises.

Green leases are good for everyone. Landlords, tenants and the environment

Including green clauses in leases is good for the environment and good for business. This is because it helps to create a more sustainable and friendly place to live and work. However, we find that despite the growing popularity of green leases, economic and financial issues are often a source of contention between landlords and tenants in the drive to meet ESG requirements.

Tenants may argue that they need to generate additional funds to meet the requirements introduced by green clauses, and the reverse is also often true – landlords need to budget for adapting buildings to a changing world. Indeed, today’s tenants are increasingly environmentally aware and tend to choose properties whose owners are committed to sustainability initiatives. This is why dialogue between the parties and the development of an acceptable compromise is so important.

The commitment of the parties (especially the landlord) to implement educational programmes for staff and tenants to promote sustainable property practices is also very important, as even the best written clauses will not produce the desired results if they are not applied in practice.

Questions? Contact us

Malwina Jagiełło

[i] Raport Certyfikacja zielonych budynków 2021

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