Greening the Model Commercial Lease

The Model Commercial Lease suite of documents comprises various template commercial leases and associated documents. They are available for anyone to download from the MCL website without charge and are intended to avoid much of the unnecessary negotiation on most routine letting transactions, by representing a fair starting (and, in many cases, end) point for both parties. The committee responsible for the MCL has been considering which changes should be made to the form of lease to reflect the Better Buildings Partnership’s Green Lease Toolkit. The current version of the Toolkit was launched in January 2024 and its green lease clauses form part of a variety of important practical tools to support greater owner/occupier alignment in using leases to promote sustainability strategies for their properties. The MCL for many years has had a sustainability schedule (Schedule 7) reflecting some aspects of the original version of the Toolkit. The new Toolkit has a wide variety of green lease drafting with so-called “light”, “medium” and “dark” versions for many of the clauses. These options cater to the specific nature of the property and the goals of the owner/occupier. The MCL Committee has carefully considered which version of the green lease drafting provisions should be included in the MCL, acknowledging that the Toolkit serves as a valuable resource for owners/occupiers with tailored needs. The MCL drafting generally seeks to reflect the market position. Some of the Toolkit’s clauses are not commonly encountered in commercial leases at this time and so have not been included in the MCL. Every property, owner and occupier is different and the Toolkit’s green lease clauses should be considered in full, since the MCL’s approach may not be appropriate for a particular situation or transaction. The MCL Committee will continue to review market practice and, if a provision from the Toolkit that has not been included becomes normal in commercial lettings, it will be included in future versions of the MCL. Changes to MCL to reflect the Toolkit We have set out some of the material changes made to the MCL (office lease of part) to reflect the Toolkit. The changes are included as part of the new version 1.8 of the MCL suite of leases. Where the MCL has departed from the Toolkit, it is because the MCL Committee considers that this better reflects the current market position. Schedule 1, Part 2: Landlord’s Rights (and associated costs provision (clause 4.6.3)) Paragraph 3.3 (Entry on to the Premises) The previous version of the MCL included an optional right for the landlord to enter the premises to improve their environmental performance, which could only be exercised if the tenant consented, and it had an absolute discretion over whether to provide consent. One of the reasons for this drafting was to enable the landlord to use the so-called “consent exemption” from the Minimum Energy Efficiency Standard if the tenant refused consent. If the tenant provided consent, then there was an optional provision in the tenant’s covenant to reimburse costs incurred by the landlord (clause 4.6.3) for the carrying out of works to improve the environmental performance of the premises. It was considered that this drafting may be helpful where the premises had a sub-standard energy performance certificate rating and the landlord could not lawfully let the premises without carrying out requisite works or relying on an exemption from MEES. For the new version of the MCL, the approach is more consistent with the Toolkit’s approach. The tenant no longer has an absolute right to refuse consent (instead, consent is not to be unreasonably withheld or delayed) but, if consent is given, the works are carried out at the landlord’s expense (if the tenant lawfully refuses consent, the landlord may still be able to rely on the consent or another exemption from MEES). The revised right remains optional since there is no established market practice and reference should be made to the previous version 1.7 of MCL, available from the website, for the previous form of wording. The revised right also relates to improving the EPC rating or any other environmental rating of the premises or the building, reflecting the Toolkit provision. Schedule 6: Works Paragraph 2.7 The tenant is now obliged, as soon as reasonably practicable following completion of the permitted works, to give the landlord information in sufficient detail for an accurate assessment to be made of the effect of the permitted works on the environmental performance or any EPC rating or any other environmental rating of the premises or any other parts of the building. Schedule 7: Sustainability The structure of this schedule remains largely the same as the previous version 1.7 of the MCL retaining the co-operation, environmental forum, data sharing and alterations provisions (although the content has changed), but there is a new metering provision. Co-operation to improve environmental performance (paragraph 1) This largely reflects the light green version of the co-operation provision in the Toolkit, but it does not refer to social impact (as the MCL Committee considers that this does not reflect the current market position for lease drafting). The MCL also includes a slightly stronger obligation for the landlord and the tenant (not just an agreement in good faith) to cooperate in identifying strategies to improve the environmental performance of the premises and the building. Environmental forum (paragraph 2) This reflects the medium green version of the Building Management Group provision in the Toolkit, but it does not refer to social impact. There is a new final paragraph for what happens if no forum is established. Data sharing (paragraph 3) This largely reflects the data-sharing provision in the Toolkit, but it does not refer to social impact. The Toolkit only includes one version (a light green version) of the data-sharing provision, because it is such an important issue and the Toolkit authors regard it as proportionate given the importance of sharing the data and it being something the parties should be able to agree. The revised MCL provision broadens the provisions in version 1.7 of the MCL, since it extends the ability to disclose the shared data to cover possible reporting and finance requirements of the parties, and it provides for the landlord to have access directly to utility suppliers supplying the premises, in order to obtain consumption data for the premises. Metering (paragraph 5) This provision is new and is largely based on the Toolkit’s metering provision, although the MCL provision gives the landlord a right (rather than an obligation) at its own cost to install metering equipment to measure energy and water consumed at the premises. Since the landlord does not have an obligation, the MCL wording does not include the Toolkit drafting relating to the landlord’s failure to install the equipment. Feedback The MCL Committee hopes that its lease changes to reflect the Toolkit will be helpful, but it is always interested in any feedback (which can be provided via the website) on what can be improved in the MCL suite of documents. Access the Model Commercial Lease suite of documents at: www.modelcommerciallease.co.uk/ The BBP’s Green Lease Toolkit is available at: www.betterbuildingspartnership.co.uk/green-lease-toolkit-0 Warren Gordon is a senior professional support lawyer n the real estate team at CMS and Matthew Pomfret is a partner in the real estate team at BCLP Easy being green Jonathan Kay offers an explainer on what green leases are, and the key considerations involved when it comes to commercial property. According to the UK Green Building Council, 40% of the UK’s total greenhouse gas emissions come from the built environment. Building operations are reported to be responsible for 28% of global greenhouse gas emissions and building materials and construction contribute a further 11%. This means 39% of global emissions are produced by buildings alone. These statistics put into context why over the past decade there has been an increased effort to reduce the environmental impact of the property and construction industries, and why there has been an increased adoption of green leases as a result. The UK government remains committed to decarbonise all sectors of the economy by 2050, a goal which was first set in 2019. However, if the property sector and UK in general is to meet its net-zero target, it is clear that further action in the industry is needed. What is a green lease? Green issues are becoming an increasingly important part of the landlord and tenant relationship, but it is worth mentioning that green leases are nothing new and there is currently no market standard. Green lease provisions can broadly be categorised into three types which indicate the varying degrees of commitments that landlord and tenants can make – “light green”, “medium green” and “dark green”. There isn’t a specific type of document or a set checklist which makes a lease green, a lease can be considered green if it contains commitments that are intended to improve the sustainability of a building or reduce its environmental impact. There are three types of green leases, of which the shades above indicate the varying degrees of commitments that landlords and tenants can make. Light green clauses are likely to not be legally binding, to impose limited commitments and to improve energy efficiency. These are sometimes recorded on a memorandum of understanding. Dark green clauses are more onerous and legally binding, require a more significant level of commitment from a landlord and/or a tenant, and cover a wider range of environmental issues. Medium green clauses sit somewhere in between – these clauses are likely to be in the lease itself or in the building policy or estate regulations (which the lease requires the tenant to comply with), giving one party legal recourse if the other is in breach of the obligations. A green lease “clause” is a provision within a property lease which specifically outlines obligations within the lease. There are various clauses, such as: An obligation on the tenant to conduct repairs and alterations to equipment and premises using sustainable materials A clause prohibiting the tenant from conducting any repairs and alterations that would negatively impact the premises’ EPC rating Giving the tenant a right to install charging facilities for electric vehicles A covenant for the landlord to have regard for good environmental practice in relation to managing and carrying out works on the building. What are the benefits? It is estimated that 80% of buildings that will exist in 2050 have already been built, which illustrates how significant a role the property sector is going to play in the drive to net zero, highlighting that the bulk of the savings are going to have to come from existing stock. Green leases present one way in which the property industry can reduce contribution to global emissions and help the UK to achieve net-zero targets while also presenting benefits for both landlord and tenant, including: Reduced utility costs, resulting in the landlord paying less and the savings being passed onto the tenant in the form of reduced service charges. Easier to comply with any future changes to legislation as the landlord will already be ahead of the curve. Businesses can adhere to environmental, social and governance policies and meet carbon footprint targets easier. Energy efficient buildings are, generally, valued higher than those that are not. Improved attractiveness of the building to prospective buyers and tenants. Most importantly, collaboration and cooperation is key for any commercial property to have a successful green lease. While the specific provisions of green leases may differ from building to building, it will be essential for landlords and tenants to work together if the property sector is going to do its part in reaching net-zero. Jonathan Kay is a senior associate solicitor in the real estate team at Blacks Solicitors Image © Ricardo Gomez Angel/Unsplash