Green leases: Enhancing asset sustainability and landlord-tenant ties
Whatever be the language of these contractual obligations, the intent remains to foster a truly collaborative and mutually beneficial relationship between both parties
2030 is just around the corner. With this, a lot of companies, including both landlords and occupiers, are looking at the sustainability commitments that they have set, particularly for scope 1 and 2 emissions, and wondering how they can bridge the gap between current and targeted performance.
CBRE research showed that 55 per cent of occupier survey respondents in the Asia-Pacific (Apac) had committed to net zero, with the majority of these committing to net zero by 2030. All these organisations will have to consider the emissions associated to their real estate portfolios, which will form part of, if not the majority, of their scope 1 and 2 emissions footprint.
Governments, including Singapore’s, have their own commitments to meet and have further increased the pressure on companies via mandatory climate reporting, as well as through initiatives such as the Building and Construction Authority’s (BCA) Mandatory Efficiency Improvements.
To support this, organisations are focusing on making investments in reducing energy consumption via energy efficiency and through the procurement and generation of renewable energy. This sounds simple; however, we do see significant challenges in making these changes a reality.
A key challenge is that landlords and occupiers are highly reliant on each other making changes to truly see an impact. In multi-let assets, occupiers can be responsible for over 70 per cent of total building emissions. Yet, landlords are usually the ones expected to deliver improvements in asset performance.
This leads to a split-incentive challenge, a key blocker to the implementation of sustainability initiatives in real estate.
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Landlords are hesitant to invest in energy efficiency and renewable energy, as they see no payback and it is the tenants that receive the benefits of associated energy savings.
Tenants are less likely to invest in equipment or fixtures to improve energy efficiency because they will either be investing in landlord equipment or in equipment that will have to be ripped out at the end of their tenancy.
In single-let properties, this can be less of an issue as tenants have complete control over the building and they will be the ones seeing the benefits of investment. However, for landlords, there still exists the challenge of getting tenants to be aligned to their sustainability agenda.
What’s green about green leasing?
To help overcome this, organisations are looking to green leases. Green leases refer to those leases and agreements between landlords and occupiers that are aimed at reducing an asset’s environmental impact and promoting sustainability in building operations.
They typically include clauses related to topics such as cross-party collaboration, data sharing, utility performance, alterations, health and wellbeing, waste generation, and building certifications. Recent CBRE research showed that there were a range of desirable features covered within green leases, but reporting and disclosure were top of the list.
Ultimately, green leases contractually oblige both parties to focus on sustainability and to support each other to improve their performance, achieve long-term targets, and comply with upcoming legislations.
They ensure that each party can be held to account in the areas of the property for which they are responsible, and increases the transparency with which both parties can review performance.
There has already been a significant uptake of green leases in Europe and the United States. This can be explained by greater legislation in Europe and large global organisations based in the US and Europe setting ambitious climate targets.
In Apac, there has been slower adoption. Organisations are still hesitant to implement these contractual obligations where they are not necessary.
Landlords do not want to deter potential tenants with additional requirements, and tenants do not want to risk increasing rents due to increased landlord commitments. However, with greater legislation coming into play, more targets being set, and ever-tightening requirements on building certifications, green leases are starting to become a more normal practice in Apac, particularly for landlords and those global corporates with headquarters in Europe and the US.
In a recent CBRE Apac Occupier Sentiment Survey, almost two in three organisations deemed green leases to be at least a high priority. And almost 20 per cent of organisations would seek a discount on rental values if green leases are not present, outright rejecting a proposal, or paying a premium if they are present.
Different organisations have different levels of sustainability ambitions and overall business requirements. Therefore, some clauses just might not be applicable or achievable for certain businesses, and so there is no “one size fits all” solution to green leases. This creates complexity when looking at green lease frameworks and, in the past, this has been another barrier to their implementation.
To help address this, certain organisations are laying out frameworks that can help clarify what clauses might be best for a particular business.
In Singapore, the BCA has developed a green lease toolkit to lay out the minimum standards for green leases locally.
More widely, Green Lease Leaders have established model language for green leases and the Better Buildings Partnership (BBP) have created a green lease leaders’ framework, customisable with clauses that are rated Light Green, Medium Green, or Dark Green.
Whatever the language, the intent remains to foster a truly collaborative and mutually beneficial relationship between landlord and occupier, helping both parties to realise sustainability impact and achieve meaningful goals.
Green leases can enhance property values, reduce costs, create stronger relationships between landlords and tenants, and enhance overall building experiences. By utilising available frameworks, engaging sustainability experts, and developing deeper relationships with landlords/occupiers, organisations can deliver significant improvements in sustainability and support a greener future for all.
The writer is head of Occupier ESG Solutions, Singapore at Paia
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