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The scope of green leases has expanded to become more encompassing and holistic, as both occupiers and owners alike develop more comprehensive sustainability goals that cover a broader range of topics beyond climate change, such as biodiversity; diversity, equity and inclusion; wellness; and community engagement.

Real estate is one of the biggest contributors to climate change, accounting for approximately 40 percent of total global emissions (World Economic Forum, 2022). As real estate managers and owners, it is our responsibility to ensure our assets are managed with appropriate consideration towards a broad range of sustainable issues, based in the belief that an asset managed sustainably will deliver better values and returns for our clients.

To address the greenhouse-gas emissions associated with real estate, governments have slated regulations on minimum building performance requirements, and extensive efforts will have to be undertaken to refurbish and renew existing buildings. For example, in the UK, the minimum energy-efficiency standards (MEES) regulation requires landlords of commercial properties to have a minimum energy performance certificate (EPC) rating of F or G, from April 2023, and B by 2030¹. Thus, there is a strong driving force in the near term to decarbonize the existing building stock.

As landlords, we are only one stakeholder group in the real estate ecosystem. Our tenants, who typically occupy the majority of a property’s floor space on a daily basis, are another important stakeholder group whose actions have significant implications on the environmental profile of our assets.

Unfortunately, landlords and tenants are not traditionally well positioned to collaborate on sustainability initiatives due to the split-incentive dilemma: landlords are often not incentivized enough to undertake long-term capital improvements, which increases operating costs for tenants, while tenants do not want to undertake long-term capital improvements, as they may not occupy the asset long enough to realize the net savings. This short-term perspective of occupiers is further exacerbated by the fact that lease lengths have shortened significantly in certain markets, eg from durations of 15 to 25 years to 5 to 10 years in the UK, Ireland and the Netherlands (Urban Land Institute, 2023).

Green leases are, therefore, a practical and important tool that help to bridge the gap between landlords and tenants, fostering collaboration and aligning both parties’ environmental goals and targets through the asset’s operation. The importance of green leases is increasing. A 2023 Knight Frank survey among 45 investors ‒ including investment managers, listed property companies and funds ‒ found that 100 percent of respondents are currently using green leases to realize their ESG targets.

A green lease is a lease agreement that includes provisions designed to encourage the landlord and tenant to work together with the aim to reduce a building’s negative environmental impact. In practice, this usually takes the form of an additional green lease schedule appended at the end of the contract, which spells out the legal obligations of both parties towards sustainability topics.

The provisions in green-lease terms typically encompass all sustainability topics that are important to both parties, and often including requirements on how the asset can be sustainably operated (or improved). For example, a green lease could include requirements for low-carbon tenant fit-outs, to minimize the embodied carbon impact of tenants, and they may also mandate data sharing by the tenant so the landlord ca n track (and possibly identify areas of improvement to) the operational emissions in their tenant-controlled spaces.

¹ Expected trajectory, but no confirmation yet. The British government has not released the findings of a consultation on raising the MEES to B by 2030.