Thorny issue

A survey of commercial landlords and tenants about their views of green leases reveals significant differences of opinion. Seth Love-Jones reports

Green leases are inevitable, or at least commercial property investors seem to think so. The subject has been skirted around for a couple of years now, but it appears that the sector is warming to the idea of them, with almost two thirds of commercial property owners feeling that their existing leases are inadequate for meeting their sustainable needs. In fact, I would say that the call for them to be adopted is gathering momentum.

There is, however, still a very clear difference of opinion between commercial landlords and their tenants, according to the results of a TFT Consult survey of both groups. Significantly, three quarters of investors and landlords expect to see a form of green leases being adopted on their buildings in the next 12-24 months, with a similar percentage of tenants not expecting it to happen.

As property consultants, we have been exploring ways of making commercial buildings more sustainable. Identifying the issues that must be addressed to improve the sustainability credentials of the property is important, although it is key to then have the right agreement in place to enable action to be taken to address the issues. As a result the topic we keep coming back to is green lease, a thorny issue that appears to have split the sector.

Having held focus groups, attended seminars and studied the way in which green leases have been implemented in Australia and the US, we believe that the adoption of a green lease in one form or another can be an effective step towards increasing the positive impact made by the sector in response to environmental, social and economic concerns. Rather than being enforced though, any form of lease or agreement would need to be the result of a collaborative approach to the issue between the landlord and the tenant.

This last point is one of the few areas that both parties seem to agree on. Of those surveyed, 81% of investors and landlords feel that they will need the full co-operation of their tenants before implementing any form of green lease, with every tenant agreeing that they would need to work together with their landlord. In a similar vein, over half of both parties believe that the costs of implementing sustainability measures should be shared between those who own the building and those who occupy it.

Effect on property value
An area where investors themselves seem unable to agree is what will be the commercial consequences of increasing a property's sustainability credentials.

There is an even split between those who believe that a more sustainable building will result in a higher property value to those who expect no rise. Only 11% of commercial property owners believe that they would be able to gain any extra income from a more sustainable building, however, 39% expect there to be a reduced tax burden. Commercial property owners are clearly well informed and reflect the findings of the recent research carried out by RICS on the link between commercial property value and sustainability, which concluded that there is no proven link between the two.

There is also a fear that a tenant's green requirements will result in increased costs to the landlord under repair and refurbishment contracts. Financial implications are fuelling anxiety from tenants towards green leases, with the vast majority worried that they will bear the brunt of the bigger financial responsibilities that going green would create. However, an area where they do not expect to see any financial implications is rental costs, with only 21% thinking that they will see rents increase.

It is not all about increased value of sustainable property. There is a justified fear that quite the reverse may start to happen. Both landlords and owners are eager to avoid any negative impact on their property value as a result of substandard properties or, worse still, a property becoming sustainably obsolete. Only by identifying properties that will be negatively affected, or that need further investment to bring them up to standard, will devaluation be prevented. Identifying these properties in good time and putting a strategy in place to ensure they do not slip into this new form of obsolescence is a rapidly growing area.

As a sector we are accustomed to the familiar concepts of functional, structural and geographical obsolescence. ‘Sustainable obsolescence' is where a property becomes obsolete as a direct result of its physical characteristics. If the sustainability credentials of a particular property (such as energy efficiency, location or future adaptability) cannot be improved within certain financial parameters then it will be deemed sustainably obsolete. There are many building that are already at or nearing sustainable obsolescence, the owners and occupiers of which are blissfully unaware.

The green lease future
If the introduction of green leases are inevitable, in what form are they likely to be implemented and what needs to be done to support the process?

So far there appears to be three gradients of green leases: dark, light and a memorandum of understanding. All three establish practices for both parties in taking measures to improve a building's effect on the environments. Both dark and light green leases are legally binding documents that replace the standard lease. A dark green lease includes specific obligations and targets, whereas a light green lease includes more general obligations without setting specific targets. The third option is the inclusion to a standard lease of a supplementary non-legally binding memorandum of understanding.

It is the two moderate versions that appear to have the most backing with 43% of landlords saying they would consider signing a light green lease and a further 37% finding a memorandum of understanding most appealing.

It is also clear that, while there is an acceptance that increased sustainability and green leases are inevitable, both landlords and tenants feel that there needs to be stronger support from the sector as a whole, as well as from the government.

Around three quarters of respondents feel there needs to be some form of government incentive to assist with the cost of transition and over 90% of landlords see it as important for a supportive legal framework to be created. It is also as important that there is an industry mechanism to ensure fair distribution of financial benefits between the landlord and tenant of a green building.

The commercial property sector is under pressure to do something about sustainability. The question is, how far will the sector go in its efforts to implement changes, how committed will it be in implementing changes, and what will the middle ground look like where landlords and tenants will meet?

Seth Love-Jones is head of TFT Consult