November 12, 2024
Jessica Pilz, Head of Sustainable Investing, Private Markets recently attended an in-depth discussion with EG and Clyde & Co to unravel the good, the bad and the ugly of green leases.
How do you solve a problem like a green lease? Easy, don’t call it a green lease.
That was the outcome of an in-depth discussion held in partnership with Clyde & Co to unravel the good, the bad and the ugly of green leases and to try to understand why a concept introduced more than a decade ago still isn’t best practice.
With a growing understanding from the industry about the impact of buildings – both in their build and operational stages – on the environment, discussions about how to minimise that impact are being had more and more. However, the green lease continues to be something of an anomaly rather than the norm.
To understand why, EG gathered more than a dozen experts to share best practice on how they are driving the green agenda forward and what tactics they are utilising to make sure that landlord, tenant, lawyer and financier all work together for the greater good of the planet.
It’s all in the word
One of the big topics of conversation was around the term “green” lease or “green” clause, with most wanting a ban on the
word.
“One of the reasons I don’t like the green lease concept is because I think it would be great to get to a point where we are not talking about green clauses or green leases by exception and that is just the norm,” said Greycoat Real Estate director Dan Higginson. “Real estate in the UK has long been a very adversarial landlord/tenant arrangement and that doesn’t set us up well to agree together that we want to do the right thing.”
Jessica Pilz, head of sustainability of Fiera Capital, believes the solution in getting more adoption of green clauses is to be smart and to think about changing human behaviour.
“There is so much legislation that points us in the right direction,” she said. “There are foundations there where we can say that putting these things in the lease isn’t green, it’s just legislation. At the end of the day, this has got nothing to do with sustainability, it is just about changing perception and repositioning and getting us all to the same place. This just has to be best practice.”
“Part of the problem with sustainability generally is that there are so many different acronyms, bodies, descriptions and targets that no one really knows where they should be going,” added Higginson. “A little bit more standardisation on how we are going to get there is what we need.”
Some of that standardisation is starting to filter through. The model commercial lease with its attached sustainability schedule is being utilised more and more, said Clyde & Co partner Annabelle Redman, and the Better Buildings Partnership’s Green Lease Toolkit provides a handy guide for the sector.
For many of the experts, however, the biggest challenge was how to bring smaller and less sophisticated landlords and tenants along on the journey. For many SME tenants, “green” clauses are viewed as a cost, while for others some of the demands of such clauses feel impossible. Many may not have the capability to capture or share the data that they are being asked for, others may not understand why their landlord wants that data and what they are going to do with it.
“There is a lot of fear around cost and trust,” said John MacDonald-Brown, founder of Syzygy Consulting. “But those are all things we can deal with. It is about being an open book.”
Anna Beckett, associate director at Buro Happold, agreed. “Small companies are really interested in cost,” she said. “We need to utilise the data to give them practical solutions that will enable them make positive moves.
“If you can understand what the problems in a building are and how people are using the building, then it becomes really relevant to what you are asking your tenants to do and what you are asking them to share.”
Jane Blore, managing director, asset management, at Martley Capital, said one of the ways the firm was working to engage more closely with tenants, particularly smaller occupiers, was talking with them about what they can do to help improve the efficiency and green credentials of their space.
“Rather than giving them money, when we are doing a re-gear, we say why don’t we spend that money on something that will help you with your efficiencies,” said Blore, adding that so far it had proved to be an effective way of moving the sustainability dial forward.
At the vanguard
The importance of the larger and more able landlords leading by example was shared by all the experts around the table. “As a large institutional landlord with relatively deep pockets that is a long-term investor in the places that we operate and want to make sure our buildings are up to standard, we have a responsibility to lead by example,” said James Manning, London estate strategy and performance lead at Grosvenor.
“If we aren’t doing it then there really is no hope for some of these smaller landlords, investors and tenants. We need to demonstrate that it is possible and important.”
“I think everyone is doing green clauses in a standard lease to some extent,” added Fiera’s Pilz. “We clearly all are, but that is not the problem. It is about how do we get the rest of the market to.”
To do that, most agreed that there was a need to shift away from the assumption that going green costs a lot of money and has to be done straightaway. All agreed that there was low-hanging fruit that could be captured, provided collaboration and communication between landlord and tenant took place.
“We need better articulation of why you are doing it for occupiers,” said Higginson. “There is a lack of understanding of why some things are important. And the more that you feed back, whether it is in hard data or in why we think something is a good idea, the more it helps to educate.”
“Leases are a framework for collaboration,” added Anna Hollyman, co-head of the UK Green Building Council’s Regenerative Places Programme.
“And the crux of the issue seems to be about the cost and value equation and how that looks in the short, medium and long term and who is responsible and who benefits. Everyone is on their journey, and it is important to understand where priorities are and to find a common ground with mutual benefit.”
Individual and collective goals
That common ground may well come through increased legislation as the UK gets closer to its target date of 2050 for being net zero carbon and the increasing temperature of the planet drives more action, but it will also come through collaboration, said Clyde & Co’s Redman.
“It has to be about understanding each other’s needs and what is in it for them,” she said. “I’m optimistic that we will get there as a collective – it might take a little time but we will get there.”
For fellow partner Will Deeprose, that collective action comes in understanding that there is no one-size fits-all solution for this and that, while there may be a collective goal, the key to progress is tailoring a lease agreement – green or otherwise – to suit the environment in which it is being used.
Perfection is the enemy of the good, agreed the experts, and the least sustainable building is not the one without all the green features and green clauses in its lease, it is the one that is sitting there empty.