Will green leases get the green light to become the market standard?

In the wake of ongoing and unavoidable climate change, the European Union has decided to adopt a series of environmental, social and corporate governance regulations, commonly referred to as ESG (Environmental, Social, Corporate Governance). The new regulations have catalysed the development of sustainable construction, including green leases, which support the process of sustainable building operations. Although green leases are not as common in Poland as, for example, in France or the UK, they are steadily gaining the interest of real estate market participants. In the coming years, tenants and landlords are expected to increasingly turn to solutions developed in the course of implementing ESG principles. The addition of green clauses to lease agreements, which will support the conscious and sustainable use of premises, will become standard practice.

Despite the growing interest in green leases, Polish and EU legislation has not yet introduced a definition and scope for this concept.

According to the developed market standard, green leases are lease agreements supplemented with provisions relating to ESG issues. Their purpose is to enable the sustainable use of the property at each stage of operation, and the implementation of green clauses is intended to reduce the negative impact of the property on the environment. The use of green clauses is not limited to leases – they can also be found in other contracts related to real estate operation.

Green leases are gaining popularity because they benefit both landlords and tenants. For landlords, they offer the chance to create an attractive investment (building) that will also be of interest to ESG-conscious customers pursuing their own ESG strategies, which can consequently have a significant impact on the sale price of the investment in the future. From the tenants’ perspective, green leases help to reduce maintenance costs and increase the comfort of the premises.

As there are no regulations governing the operation of green leases, their scope and nature is primarily shaped by market participants.

The most common solution is to prepare a model lease agreement containing green clauses by the landlord, who then applies it uniformly across all premises in the building. With the growing awareness of tenants, in view of their desire for sustainable use of their premises, the initiative to implement green clauses is also increasingly coming from tenants. In the latter situation, the possibility of including green clauses in the lease depends on the landlord’s policy (subjective factor) and the characteristics of the property (objective factor). Whatever the scenario, however, it should be borne in mind that as long as the inclusion of green clauses in leases is not mandatory, any arrangement in this regard depends on the will of the parties.

Green clauses can be included directly in the body of the tenancy agreement or be added to it as an annex. Alternatively, green provisions can be included in the building regulations. Regardless of how green clauses are implemented, their enforceability depends on the type of provisions used and the actual commitment of tenants and landlords to ESG goals.

Green clauses are divided into so-called light-green clauses and dark-green clauses. The first type is characterised by the absence of an obligation on the parties to the lease to achieve a specific result through their ESG actions and the absence of sanctions for failure to do so. The second type provides for enforceable obligations related to the implementation of the sustainable use of buildings and sanctions for non-performance, such as contractual penalties. Sometimes tenants and landlords opt for the intermediate solution of including hard commitments in their leases without securing their implementation with sanctions.

As tenants and landlords become more aware of the benefits of green leases, it is expected that the number of dark-green clauses will steadily increase. This will certainly also depend on the eventual implementation of legislation obliging market participants to take measures for sustainable use of real estate.

Currently, green clauses are most commonly used to regulate the actions of tenants and landlords during the construction phase of a building, the carrying out of fit-out works and the use and management of buildings. Green clauses for the construction phase can relate to all aspects of the building process, but most commonly regulate the design of building installations and systems, facilities for people using the building, the use of energy-saving technologies and the design of efficient waste management.

At a later stage in the life of the property, green clauses are used in relation to the finishing work of tenants and landlords, and particularly in relation to the use of building materials, the furnishing of the premises and the collection of waste generated during the construction work. Green clauses relating to finishing work are primarily intended to secure that the premises are adequately prepared for sustainable use, including use in such a way as to save water or electricity. Green clauses make it possible to ensure the comfort of the users of the building and premises and to reduce the emission of hazardous substances and materials associated with the investment process.

The most common solution associated with green clauses is energy conservation. It refers to a wide catalogue of possible solutions, but provisions in leases most often focus on energy efficiency, limiting the amount of equipment that uses electricity, and limiting energy consumption during periods when the building or premises are not in use. Independent of the commitment to energy conservation, green leases may also contain provisions relating to the parties’ obligation to purchase and use energy from renewable sources.

At a time of intensive energy transition initiated by the European Commission’s announcement of the so-called Green Deal, according to which economic activity in the European Union should be carried out in a sustainable manner and in support of EU environmental objectives, there is no escaping the need to adapt the environmental performance of buildings to the new requirements. It can be expected that buildings with poor environmental performance will become increasingly unattractive not only to potential buyers but also to tenants. All these factors, and above all the growing interest of the financial sector in supporting sustainable investments, as well as the ongoing legislative processes in the EU, indicate that green tenancies will become a permanent fixture in the standards of the real estate industry.