One topic where our Real Estate Disputes team thinks we may see an increase in interest by property owners and occupiers relates to consents, e.g. consent for occupiers to assign or carry out works. 

Property owners are increasingly re-evaluating their estate management policies to focus on their ESG aspirations and obligations.  This has the potential to have a significant impact on day-to-day lease negotiations and disputes relating to common lease clauses such as alienation and alterations provisions.  For example, some property owners will be looking to introduce polices which allow them to refuse to let to those with less than stellar green credentials, as well as requiring a greener approach to occupiers’ fit out and alterations.

Alienation: can property owners refuse consent on the basis of ESG policies?

Leases will generally require occupiers to obtain the owner’s consent to assign or underlet, such consent not to be unreasonably withheld. 

It is already established that a property owner can reasonably refuse its consent to an assignment or underletting in order to keep a good occupier mix:

• In a recent case, the owner was considered reasonable in refusing consent to the assignment of a lease of a property on Regent Street, London, from a jeweller to a bureau de change, as limiting occupiers to flagship retail stores was a legitimate estate management objective, even if the occupier may not have been aware of that policy.

• In another case,  the owner refused its consent to an assignment of a lease from Moss Bros to Game, a computer games retailer, again on the basis of its occupier mix policy, which sought to keep fashion retailers together to create a fashion hub. While the policy was unwritten, the court found that it was genuine and reasonable and justified the owner’s refusal. 

There is nothing in these cases to suggest that a valid and enforceable occupier mix policy cannot extend to ethical/sustainable benchmarks, provided it is clearly defined and consistently enforced by the owner and does not reduce the class of acceptable occupiers to a level which severely restricts the prospect of assignment.

Alterations: can property owners refuse consent to non-green alterations?

As with alienation, leases generally require owner’s consent for occupiers to carry out alterations, which cannot be unreasonably refused.

Many property owners have carbon reduction commitments and sustainability objectives, which could impact on their approach to alterations – for example, is it reasonable for an owner to refuse consent to works which are inconsistent with those objectives, or impose sustainability-related conditions to its consent?

Although this has not yet been properly addressed in the UK courts, it will likely be considered increasingly reasonable for property owners to refuse consent to alterations which do not comply with their carbon reduction commitments or sustainability objectives, or impose conditions ensuring those objectives are upheld.

Key factors to consider when imposing ESG property policies

All of that said, when imposing such policies, property owners will need to take time to consider how those policies interact with other provisions in the lease to mitigate against unintended consequences.

For example, if a property owner specifies a very limited permitted use for the property within the lease, or limits who an occupier can sublet or assign the lease to, the potential market for that lease will be reduced. This may have a negative impact on the market rent determined at rent review, leading to lower yields. Similarly, an estate management policy which is too rigid and arbitrarily rules out any future change of use could amount to a derogation from grant, effectively undermining the occupier’s ability to use the property. 

As a result of the continued focus on ESG considerations, it is likely that property owners and occupiers will increasingly find themselves in situations where they need to grapple with the enforcement of estate management policies focussed on ESG matters.

Green lease corner – clause analysis

In each issue of our ESG bulletin we take a brief look at a particular green lease clause (or group of clauses) and this time we are taking a look at landlord covenants.

This has always been a tricky area.  Early green leases tended to place most of the compliance burden on tenants, restricting how premises could be altered and requiring occupiers to observe sustainability-focused regulations.  However most landlords now recognise that this has to be a two-way street, and that if:

• tenants are to be expected to commit to green lease drafting;
• sustainability and energy efficiency are to be maximised; and
• landlord’s commitments to ESG are to have credibility

then building owners have to share the responsibility for the costs and obligations that underpin sustainable building management.

Typical landlord covenants that you may therefore see will include:

• a commitment that, in providing services to a building (and when carrying out alterations to the building fabric or common parts), the landlord will (at least) have due regard to its ‘environmental management plan’ or other policy it may have adopted from time to time in relation to environmentally responsible property management

• a commitment to put such a plan or policies in place.

The ‘Sustainability’ schedule which forms part of the Model Commercial Lease contemplates the landlord setting up an environmental forum through which all occupiers of the building, together with the owner, seek to review and improve environmental performance. 

It may be that you will also see more specific covenants, such as obligations to procure (or use reasonable and commercially prudent endeavours to procure) electricity from renewable sources, backed by Renewable Energy Guarantees of Origin (REGO) certificates or similar, or covenants around waste reduction targeting diversion of waste materials from landfill.  Any such covenants must, of course, be considered on a client by client, and asset by asset, basis.

Increasingly common, also, will be obligations on the landlord to share data and information with its tenants – but we’ll look in more detail at data sharing clauses next time.

STOP PRESS

The Better Buildings Partnership’s Green Lease Toolkit was first issued in 2013 and established a market baseline for green lease drafting.  A revised and updated toolkit is anticipated to be launched by the BBP on Monday 29 January and will, we expect, set a new benchmark for green lease provisions.  So watch this space!

Biodiversity Net Gain and other environmental compensatory measures

After much anticipation, and a lengthy gestation since its introduction in the Environment Act 2021, biodiversity net gain is due to finally come into effect in February 2024.  As a result most new planning permissions in England will be subject to a pre-commencement planning condition requiring developers to demonstrate how they will deliver 10% Biodiversity Net Gain.  This gain will then need to be delivered and maintained for at least 30 years. 

There are various options for satisfying this requirement, including on-site delivery, off-site provision, and making use of a centrally operated bank of statutory credits. Our planning team has prepared a flowchart, one-pager and video to help you navigate this new regime.

The introduction of the regime does, though, present opportunities for certain landowners.  In particular, strategic landowners and others owning areas of land which they don’t propose to redevelop in the short-term, such as statutory undertakers with surplus land, may now be able to generate an income by setting aside areas of land for biodiversity net gain and selling the credits to developers.  Where landowners do pursue this option, we are likely to see an increase in demand for conservation covenants. More detail can be found here.

Although it may be one of the more advanced elements, biodiversity net gain is only part of the story when it comes to different types of environmental compensatory measures.  We are increasingly seeing a demand, both within the real estate industry and wider, for different options for companies to offset their environmental impacts. 

In the real estate sphere this is translating into measures such as nutrient neutrality – where developments need to demonstrate that they are causing no adverse water quality effects – and the emergence of marine net gain.  Like biodiversity net gain, marine net gain involves securing enhancements in the marine environment.  However, the methodology around measuring and monitoring marine net gain is more complex than for land-based gain, given the more mobile nature of the marine environment.  We are currently engaged in advising a number of different clients on how to future-proof projects for marine net gain, as well as advising those looking to develop schemes which others can invest in. If this is an area where you would like to know more, please contact Hannah Quarterman.

We can provide training on a wide variety of topics in this area including ESG risks for your properties, biodiversity net gain and conservation covenants. Please get in touch with any of the Contacts listed for more information.

Authored by Benjamin Willis and Hannah Quarterman.