Net zero drafting – going beyond EPCs

Energy Performance Certificates (EPC) became compulsory many years ago, and the government has since been nudging the property market towards making energy efficiency improvements by setting minimum standards for private rented residential and non-domestic properties.

But questions remain about whether this is enough to tackle climate change.

From 1 April 2023, it will be unlawful for a landlord to ‘continue to let’ a sub-standard property, unless an exemption applies and has been validly registered on the PRS Exemptions Register. Currently, a ‘sub-standard property’ is a property with an EPC rating of below E, but that is set to change, with the minimum rating to be raised to C in 2027 and B in 2030. See our legal insight for more information.

Whilst increasing minimum EPC ratings clearly indicates the government’s intention to tackle energy efficiency in the built environment, is it enough? Will a good EPC rating actually help to tackle climate change, or does it just give the illusion of doing so? What else can building owners and occupiers do to ensure that they are reducing energy consumption and using their properties in a sustainable way?

The case for sustainable buildings

It makes economic sense to occupy and operate sustainable buildings. Not only will energy consumption be reduced, but the investment value of a sustainable/green property has been shown to be higher than a property with poor environmental credentials. Landlords can command higher rents, and may be able to obtain more favourable lending terms. Occupiers can benefit from reduced energy bills. In addition, employee attraction and retention could suffer if you operate from a building that is perceived to be performing badly from an environmental perspective.

On the reporting side, companies with a ‘high turnover’ will be subject to new climate-related financial disclosure requirements for financial years starting on or after 6 April 2022, and the energy efficiency of buildings could have a bearing on risks and opportunities. See our legal insight for more information.

How can you operate a building more sustainably?

Whatever the EPC rating of a building, the owner and occupier can take steps to use it in a more sustainable way. Options range from the inclusion of ‘light green’ obligations in leases to cooperate to improve environmental performance, to ‘darker green’ provisions that are more prescriptive about the parties’ obligations.

There is a view that sustainability is costly, but that is not necessarily the case. For example, agreeing to use reclaimed, re-used or recycled materials for any refits may, in fact, be less costly than using new, and simply requires a new approach to facilities management, whilst supporting the parties’ ESG goals.

Examples of climate-aligned lease drafting includes:

BBP’s Green Lease Toolkit

This includes model form green lease clauses. These are designed for multi-let office buildings and focus on waste, water and energy use. Drafting is also available to restrict a tenant’s alterations if they may or will adversely affect the environmental performance and/or any EPC rating. Such provisions are now common in the market.

Additionally, there is a provision setting out that the tenant shall not be required to reinstate any tenant’s alterations that have been lawfully carried out, where such reinstatement would adversely affect the environmental performance of the premises or the building, unless it is reasonably required having regard to the landlord’s intended use or re-letting of the premises.

The Chancery Lane Project (TCLP)

TCLP has a number of lease clauses that can help parties on their net zero journey. These are darker green than the clauses in the Green Lease Toolkit.

• Aatmay’s clause – Sustainable and Circular Economy Principles in Leasing Arrangements for Repairs and Alterations

  TCLP sets out that this clause ‘enables landlords and tenants to reduce unnecessary waste and purchase of new products (and the associated greenhouse gas emissions) by prompting them to follow circular economy principles in repair and alterations, prioritising the use of reclaimed, re-used or recycled goods or materials (and, where that is not possible, to use sustainable goods or materials).’

  It is a good example of how you can improve the environmental performance of any property (including those with poorer EPC ratings).

  Whilst landlords may be concerned about the quality of materials that are reclaimed, re-used or recycled, the drafting sets out that they must be ‘of an equivalent quality [and value].’ The parties can also include drafting to provide that the materials be to the reasonable satisfaction of the landlord in the tenant repair and alterations covenants. Equally, tenants could have concerns about the use of reclaimed, re-used or recycled materials by the landlord in carrying out the services. The drafting provides that the Landlord 'shall use best/[all] reasonable] endeavours to use Materials of an equivalent quality [and value]’.

  As with the Green Lease Toolkit, the tenant is not automatically required to remove alterations at the end of the lease term. Whilst sensible, and in line with the 2020 RICS code for leasing business premises, such provisions do not seem to be standard practice in the market. Not requiring the tenant to remove alterations, as a matter of course, would assist in reducing waste and parties should be encouraged to consider this.

• Rosie’s clause – Alteration/Improvement Provisions in Leases to Improve Climate/Environmental Impact of Buildings and Better Use of Shared Space. Rosie’s clause requires landlords to act reasonably when tenants propose alterations to their premises (and associated changes of use) or improvements to common areas, which have a positive climate impact. Whilst enabling tenants to request environmentally beneficial alterations to common areas is a positive step in creating sustainable spaces, the practicalities need a little thought. If the works are outside the tenant’s demise, the landlord must consider who will be obliged to carry out repairs, and the access rights needed to do so. At the end of the term, rather than having to remove the alterations, could another tenant be given the opportunity to take them over, or could the landlord take responsibility and charge for any costs via the service charge?

Getting started

Any draft clause will need to be checked and adapted for the building in question and to reflect where the parties are on their net zero journey. However, the key is to think about how properties are used, or could be used, to make them more sustainable.

Importantly, it helps to think about these issues at an early stage – i.e. when negotiating heads of terms – so that appropriate drafting can be included and negotiated.

TLT is an active participant in The Chancery Lane Project. If you would like more information on this, or drafting for net zero more generally, please get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.