The Future's Bright, the Future's Green.
Astrid Stanley, partner at Howard Kennedy moderated the recent Bisnow panel debate "Driving Change Collectively: The Beginning of Sustainable Neighbourhoods". This identified and discussed – how to meet the sustainable and zero carbon targets for real estate. Landlords may want to supply low cost, high density buildings whilst tenants tend to want the properties they are leasing to be accessible and affordable. However, both parties should also be considering how to ensure that those buildings and spaces are sustainable, and resilient, with ecological and social value.
Pressure for sustainability within Real Estate is arriving from multiple directions. Increasingly ,consumers care about the sustainable credentials of their local restaurant, their clothing retailer, even their local bar. From the other end of the spectrum investors can see both that a resilient long term investment should take into account the climate emergency and that businesses with impressive ESG credentials are often outperforming those without.
The landlord and tenant relationship is one often typified by competing needs, however, both parties need to address sustainability in order to be able to grow and prosper as fully as possible in the future. Both landlords and tenants can see the clear advantages to sustainable buildings – for landlords a reduction in their carbon emissions, reductions in power and water costs, possibly higher rents and higher desirability; especially important when staring down the barrel of a possible recession. For tenants – a similar reduction in utilities costs and ability to deliver on corporate sustainability objectives as well as the clear connection between green buildings and employee health and wellbeing, productivity and staff retention. Landlords and tenants, recognising their mutual goal, are starting to collaborate to achieve this.
During the discussions Tor Burrows, Grosvenor's Director of Sustainability and Innovation, made the comment that "sustainability should be the easy and obvious choice" for both landlords and tenants. Perhaps the quickest, simplest way to ensure that sustainability is baked into the landlord and tenant relationship is the use of "green" leases.
Green leases have been around for a long time. Initially, they were more widely seen as a method of demonstrating green credentials. Now they are becoming increasingly commonplace because of the benefits they offer both parties. In fact , a general consensus of the members of the panel at the webinar was that they should stop being designated as " green" leases – the inclusion of "green clauses" should be standard form and reflect the reality of the current real estate market. They permit all aspects of the landlord and tenant relationship to reflect the sustainability goals of both parties and provide clarity and guidelines for utilities, repairs, alterations, landlord's works, measurements, rent reviews and energy performance to fall within.
The panel felt that collaboration and encouragement towards meeting sustainability goals was the quickest way to make sustainable neighbourhoods a reality. Thom Elliot, the founder of Pizza Pilgrims, recognised that the issues here are fundamental and affect us all, partnership between Landlord and Tenants is central to improvement and should be reflected in a lease. Any medium to long term lease of a commercial premises that didn't take these points seriously would only exacerbate the problem. However, all of these ideas must be aligned with the commercial position of the Tenant. Similar to the recent and widespread adoption of Turnover Rent in response to the Coronavirus pandemic, Thom made the perhaps radical suggestion that rents and corporation tax should be linked to a Tenant's carbon output, even while being tethered to the form of business. If by reducing your carbon output your rent will reduce then Tenants will be far more motivated to make the necessary changes.
What is clear is that, while many landlords and tenants are taking responsibility for their own sustainability goals and delivery of energy efficiency, the collaborative model is the best way to enhance biodiversity, reduce waste and deliver on the net zero carbon commitment. For those parties that are not already using green leases as their standard form, now is the time to consider how and why they should be for any future transaction. Our firm, as ever, stands ready to assist in this process and are happy to discuss this with you.