How green is your lease?

Over the last ten years we have seen an evolution in green lease clauses. Earlier leases rarely imposed clear binding obligations, and are more likely to include a non-binding statement of intent, like a memorandum of understanding relating to environmental and/or energy performance matters. As a result, there is less likely to be a potentially enforceable green obligation in a lease that is a few years old.

Are green obligations enforceable?

Even if a lease does contain a binding green obligation, there are some points that will need to be considered before that clause can be enforced:

• Demonstrating loss: It will often be difficult to show that a breach of a green lease clause gives rise to a loss. 

For example, if a tenant fails to comply with a landlord’s recycling policy, by instead putting all of its rubbish in general waste, what loss has the landlord actually suffered?  If a landlord is unable to point towards a quantifiable loss it will be difficult for a landlord to sue for anything more than nominal damages for breach.

• Specific performance: If no loss can be identified, a landlord may then need to consider seeking a court order for specific performance of the green obligation. 

However, using again our example of a recycling policy, a court may well refuse an order requiring a tenant to comply with the landlord’s policy, because this is an ongoing obligation and monitoring the tenant’s compliance would require excessive court oversight.

This is not to say that a party will struggle to enforce all green lease clauses. For instance, a lease may require a tenant to maintain a certain energy performance rating (say, a performance rating of D), but the tenant then carries out alterations to the property which result in it having a performance rating of G. From April of this year, the result is that the landlord has committed an offence by continuing to let a substandard property (i.e. a commercial property with an energy performance rating of below E). In this case, the landlord could be fined, and it could then enforce the breach by suing for a mandatory injunction requiring the tenant to remove the alterations and/or damages to recover its losses (including the fine) from the tenant.

What other action could a landlord take?

As an alternative to enforcing a green lease clause by way of court proceedings for damages or specific performance, a landlord may consider taking action to forfeit the lease. 

A market standard forfeiture provision will provide a landlord with a right to terminate a lease for breach of any covenant, which would include any green lease covenant.  However, forfeiting a lease won’t necessarily be straightforward, or in the landlord’s interest because:

• the tenant could apply for relief from forfeiture (resulting in a prolonged and costly dispute); and
• the landlord may well prefer to have the tenant remain in the premises, even if they are in breach, rather than be left with a vacant unit generating no income but incurring an empty rates liability.

What does this mean for future green leases?

The consequence of all this is that in some cases it is going to be difficult for landlords to enforce green lease clauses.  Therefore, we may well see landlords try to grapple with this issue in alternative ways.  There are a number of possible options; one is for landlords to include a liquidated damages clause (an obligation for the tenant to pay a fixed amount) for non-compliance with green lease provisions.  This comes with its own problems, including the risk of such a clause being deemed an unenforceable penalty.

It is also worth bearing in mind that this issue is not limited to ‘environmental’ clauses.  We can soon expect leases to include more clauses focusing on the ‘S’ (social) and ‘G’ (governance) of ESG to accompany the already well-established ‘E’ related green lease clauses. 

Landlords and tenants may want to include clauses dealing with matters ranging from disclosure of information relating to executive pay (a ‘G’ issue) or supply chain sustainability (an ‘S’ issue).  The issue of enforceability is equally applicable to these sorts of clauses.

Including green lease provisions in leases has been a laudable aim of landlords for many years, but increasingly now there is a commercial imperative too with the advent of potential liability for letting sub-standard premises.  Landlords who are serious about their green (and more broadly ESG) credentials, or who just wish to avoid potential regulatory sanctions, should start considering how they would enforce their green lease clauses, should the issue of non-compliance ever arise.

An earlier version of this article appeared in React News on 4 April 2023.