Organisations are becoming increasingly aware of their impact on the planet. But how can the way in which real estate is used make a difference?

The built environment is a huge contributor to carbon emissions, both through the construction process and the use of properties once built. Whilst the perception is that energy improvements cost money, property owners and occupiers could find that relatively small changes to the way in which they operate could make a difference.

Some organisations must report their emissions, and others are opting to do so. However, many organisations only report their scope 1 and scope 2 emissions. Scope 1 are direct emissions, from company facilities and vehicles, and scope 2 covers emissions from purchased electricity, steam, heating, and cooling for your own use. Scope 3 emissions (which include leased assets, purchased goods and services) are harder to quantify. But, for a commercial real estate company, most of its emissions will fall into scope 3 and knowing the extent of these will enable it to understand where those emissions can be managed and reduced.

From the development perspective, a developer will need to take into account requirements that local authorities may have (from the perspective of receiving planning permission) and that any banks providing funds may have (where such funders have committed to providing funds to buildings that do not contribute to emissions). Once it has taken this into account, as well as any other policies it has in place or expectations of its stakeholders, it will then need to consider how to ensure the contract it enters into with its building contractor contains obligations to ensure the building meets climate expectations.

From the perspective of buildings that have already been built, and subsequently let by a landlord to tenants, if the landlord is reporting on its scope 3 emissions, it will want to reduce the emissions associated with its leased assets as far as possible. To do so, it will need to engage with tenants in relation to their energy consumption so data, and an obligation to share this, is key. For tenants, a more energy efficient property will mean lower energy bills. But it could also mean intrusive works by the landlord, and this would need to be managed and balanced with the reduction in the tenant’s scope 2 emissions.

What are the challenges of designing and negotiating sustainable contracts

In a landlord/tenant context, green leases have been around for some time, and in the building context there have been sustainability policies which employers have needed to comply with when constructing their buildings. Adoption in both cases however has been limited, and any drafting tends to be ‘light green’, with parties agreeing to cooperate and use reasonable endeavours and/or share data relating to environmental performance. There is often reluctance to go further, not necessarily because the parties don’t care about minimising emissions, but often because they don’t know where to start, and they may not understand how they could reduce the impact on the climate by doing things differently. Added to this, the fact that sustainability hasn’t yet made it on to the list of things to discuss at the initial design stage (in a development context) or the Heads of Terms stage (in a landlord and tenant context), means that it is not forming part of those initial negotiations. Trying to introduce it later, when lawyers are drafting documents, means that clauses are struck out, delay often being cited as a reason.

Where the property has not yet been built, the parties need to think about which clauses need to be included in the development agreements with parties/stakeholders interested in the final project, and then ultimately how to achieve the requirements in these agreements when actually constructing the building. This could for example include a requirement to use sustainable materials or materials that do not include embodied carbon, or a requirement to ensure that the building when completed achieves a specified energy performance rating or meets other climate requirements.Where the property is already built, the key is for the parties to discuss the issues and think about them at Heads of Terms stage. ‘Easy wins’ could be circular economy drafting for repairs and alterations – why require the parties to use new materials, when they could re-use what they have, or use reclaimed or recycled materials? Or removing the standard obligation to remove all alterations at the end of the term, without even thinking about whether this is necessary. Such drafting is already in the Code for leasing business premises, and is also in BBP’s Green Lease Toolkit, yet we still see an obligation to remove all alterations, even if they improve environmental performance, in leases.

How this tool can help

The Built environment climate contracts tool flags issues to think about at Heads of Terms stage and during due diligence, and then takes you through the stages of a typical real estate transaction. If the property has not yet been built, the tool will direct users to suggestions for the pre-planning and planning stage, followed by construction, funding, and lease or sale of the property. For example, if you’re preparing a development agreement or building contract, it will suggest some clauses which may be useful to include. If, following development, you are granting a lease, you will find drafting not only for the lease but also any licence for alterations, or car parking licence. The tool is designed to bring relevant drafting together so that users can easily find wording appropriate for their matter. It is hoped that, by doing this, The Chancery Lane Project [TCLP]’s drafting will be used more widely, and its inclusion will become market standard.

Josh van den Dries, Project Associate at TCLP, says:

“Decisive, practical action against climate change is critical in the built environment, which generates almost 40% of global energy-related carbon emissions. TCLP publishes a breadth of freely available precedent clauses for use with a variety of sector contracts. This new tool empowers you to quickly identify the content relevant to your client or organisation, offering a range of innovative and creative options to deliver decarbonisation. I encourage all built environment professionals to browse these options, map out which will be most relevant to their needs and start using them in contracts.”

Authors: Alexandra Holsgrove Jones and Jamie Olsen Ferreira.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

14 June 2023



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