Green Leases – what are they and do they carry unforeseen risks?

Stacey Rees and Faye Astin look into the risks of Green Leases.

What are Green Leases?

“Green” Leases contain clauses that intend to manage and improve the environmental performance of a building. These clauses could be in the lease itself or within a separate ancillary agreement. Such clauses could relate to water management, waste management and general net zero objectives.

What are the different types of Green Leases?

Green Leases tend to be categorised into different shades such as “light green” and “dark green.” These shades categorise the level of responsibility contained in a Green Lease.

A “light green” lease will typically have provisions which are not legally binding and may just contain brief clauses relating to the property being sustainable, for example that ‘wherever reasonably practicably the landlord and the tenant will promote the environmental performance of the property’.

Conversely, a “dark green” lease will contain legally binding clauses to take steps that specifically promote the environmental performance of the property, for example, requiring specific works to be carried out in order to achieve a higher EPC rating, and requiring a certain limited amount of waste.

What are the risks of entering into a Green Lease?

Green Leases can be beneficial from a corporate social responsibility perspective as they will encourage or require parties to a lease to act in a more environmentally friendly manner.

However, as Green Leases are a relatively new concept, there is debate around whether they are legally binding. As set out above, each lease or agreement containing environmental provisions will vary in terms of whether or not it is legally binding, and the provisions would have to be considered carefully to ascertain this.

The Law Society has previously stated that a breach of an environmental clause in a “dark green” lease should not lead to a forfeiture event as this is considered too draconian.  This casts doubt over the enforceability of such clauses and what recourse a landlord has if they are breached. Also, if such a clause is breached and the landlord decides not to take any action, this may lead to reputational damage in that the landlord would not be enforcing the green clauses. Conversely if they did take steps to enforce the clauses then they would be seen as profiting from the tenant’s breach which also poses a reputational risk.

If you would like further information in respect of green leases, please contact our Commercial Property team on 0161 832 3434.