By Jarosław Witek, associate director, BREEAM AP, BREEAM NC and in-use assessor, CBRE

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Climate change and an increasing push towards sustainability are driving the real estate sector in this direction. One of the tools which significantly help achieve these targets are ‘green’ leases or ‘green’ clauses included in tenancy agreements and which are becoming increasingly popular in all types of properties. Is this a fad or a new standard in the market?

Green leases are a type of contract which helps reduce the environmental impact of a rental property. To this end, they contain appropriate clauses – with responsibilities for both tenant and landlord.

In practice, this can mean, for example, obligations to:

  • Improve the energy efficiency of the building,
    ● Use renewable energy sources,
    ● Reduce water consumption,
    ● Recycle waste properly,
    ● Promote sustainable modes of transport, such as bicycles,
    ● Use environmentally friendly materials in building upgrades.

Unfortunately, the clauses which are now called ‘green’ usually do not include any measurable indicators (KPIs), on the basis of which one can clearly determine whether the provisions of the agreement have been met. Instead, there are declarations of a desire to reduce the building’s environmental impact, which should really be treated as a PR exercise, not as a true ‘green’ lease agreement. These agreements vary depending on the type of building, and look different in offices and different in buildings with an industrial component. In the latter type of assets the tenant is responsible for up to 95% of energy consumption. This is because these buildings simply lack common areas. This means that the key to reducing energy consumption and thus decarbonising these types of buildings is solely in the hands of the tenants.

Green leases according to EU and Polish law
The European Green Deal of 2019 and the EU Taxonomy Regulation, passed a year later, set a path towards more sustainable economy of the EU. In the real estate industry, this task should be carried out through:
● Sustainable construction confirmed by appropriate certification
● Considerate use of materials, keeping in mind their embedded carbon emissions
● Minimising the amount of construction waste and its proper segregation
● Locating buildings in areas not exposed to significant climatic risks which occur now or can occur in the future, possibly protected from their impact

The above activities are usually associated with the development of new buildings or refurbishment of existing stock. In existing, tenanted buildings ambitious climate goals cannot be achieved without the involvement of tenants. Therefore, genuine green leases are of great importance. Although increasingly popular, they do not yet have a precise legal framework in the Polish legislative system. This means that their shape and principles are based on voluntary arrangements agreed between landlords and tenants. The contracting parties with the support of their legal advisors set the terms themselves such that they refer to promoting sustainability.

Examples of currently used green lease clauses in the warehouse market

  • Energy efficiency clause
    A commitment to use LED lighting, energy-efficient HVAC systems (heating, ventilation, air conditioning), although there are no clear criteria for energy efficiency of HVAC systems (this is one of the weak points of these contracts), or to install an energy management system to monitor the energy consumption and optimise its use.

  • A clause on the use of renewable energy sources
    A commitment to install solar panels on the warehouse roof or signing contracts for the supply of energy from renewable sources such as wind or solar. However, the purchase of a Renewable Energy Guarantee of Origin alone does not affect either the energy performance of the building or its decarbonisation, as the Carbon Risk Real Estate Monitor (CRREM) tool does not recognise short-term purchases of renewable energy. Only an on-site Renewable Energy Source (RES) or a long-term Power Purchase Agreement (PPA) help to genuinely decarbonise the buildings.

  • Waste recycling clause
    A commitment to segregate and minimise waste generation, and to use recyclable packaging materials.
  • The water management clause
    A commitment to collect rainwater and reuse it for flushing toilets or irrigating greenery around the warehouses.
  • Sustainable transportation clause
    A commitment to install electric vehicle charging stations at the warehouse or encourage employees to use public transport or bicycles. This is a controversial provision, as the vast majority of electricity generated in Poland still comes from burning fossil fuels (71% in 2023.) If all energy sold through PPAs and Guarantees of Origin were deducted from Poland’s energy balance, then the remaining energy is even more carbon-intensive than the national average. So in Poland, all-electric cars should not be considered low-carbon for now, unless they are powered by RES.

Information obligations in green agreements
ESG disclosure obligations (‘light-green clauses’) also appear in contracts from time to time. They require transparency and exchange of information on environmental activities or resource consumption, such as energy, water, CO2 emissions or waste generation. They help build environmental awareness and lay the groundwork for further sustainability efforts in the future. This sort of clause includes reporting on energy consumption, monitoring and analysing a facility’s environmental impact, exchanging information on ‘green’ initiatives, among others.

The advantages of green leases
While green lease clauses mean additional effort and responsibilities for the contracting parties, they also bring in some significant benefits:

  • Green leases: the benefits for tenants
    • Through increased energy efficiency of a building, tenants are able to optimise operating costs, such as electricity and heating bills
    • By reducing their operational carbon footprint, the tenants can demonstrate their organisation’s lower Scope 1 and 2 greenhouse gas (GHG) emissions according to the GHG Protocol when reporting environmental indicators in line with the CSRD
    • Investing in sustainable solutions, such as renewable energy sources and recycling systems, also saves money in the long term
    • Acting in accordance with green standards strengthens company’s positive image in the eyes of investors, its clients and employees
    • Green leases help business respond to the EU agenda on emissions and resource use
  • Green leases: benefits for landlords
    • For landlords, this is a way to increase the attractiveness of the rental space and attract prestigious tenants
    • By reducing their operational carbon footprint, landlords will demonstrate their organisation’s lower Scope 3 GHG emissions according to the GHG protocol when reporting environmental indicators in line with the CSRD
    • Genuine green solutions increase the value of the property and help increase the value of the property portfolio
    • By optimising the cost of maintaining their facilities, investing in energy-efficient systems and sustainable technologies the building owners can reduce their operating costs associated with the energy consumption and building maintenance
    • Tenants who invest in green technologies in leased properties are more likely to have a long-term relationship. This translates into greater financial stability for the landlords.