The term ‘green lease’ is used to describe leases of commercial property that are designed to address environmental concerns. Richard Sykes is a partner and head of real estate at Cayman Law Associates and reports.
The aim of the lease is for the occupation of the property to be as environmentally friendly as possible. Green Leases are commonly referred to as being in various shades of green: ‘light’, ‘medium’ and ‘dark’. The more mandatory and legally binding the obligations are, the ‘darker green’ the lease is said to be. Some obligations may take the form of actual provisions in the lease whereas some may take the form of more aspirational objectives and be contained in a non-binding memorandum of understanding between the landlord and tenant.
Some frequently asked questions and answers follow.
I haven’t heard of ‘Green Leases’ before?
Green leases are a recent creation and have only recently started to appear in some countries such as the UK, US, Australia and Europe. From an environmental perspective, it is hoped that they will become the norm for commercial property.
Why should I consider entering into a Green Lease?
There is existing evidence of the financial benefits of ‘going green’. Although in the current economic climate such leases may not be viewed favourably. In the future, the market will likely view buildings not being green as being at a competitive disadvantage.
What are some of the other benefits?
Green leases can enhance a company’s environmental image as well as potentially avoiding damage to the company’s reputation from owning or leasing environmentally unfriendly or energy inefficient buildings. It is likely that buildings that meet high environmental requirements will be better placed to attract and retain tenants in the long term. There may also be certain health benefits for employees and occupiers of sustainable buildings.
What would you expect to see in a Green Lease?
The main emphasis is placed on the energy efficiency of a building, primarily because energy consumption in a building (electricity, heating and cooling) is an important source of carbon dioxide emissions. It has been estimated that in the UK, buildings are responsible for around 50 per cent of the country’s total carbon dioxide emissions. Green leases can also cover wider environmental and sustainability issues (such as water usage and waste). Although it is not just about how buildings are constructed but also how they are used. Different considerations will apply depending on whether the building is already in existence (which may limit what the parties can do in practice unless they invest in upgrades) or new a build (which can meet high levels of energy efficiency and sustainability from the start of the lease).
What about the cost?
The potential costs of improvements can be an issue between landlords and tenants. The actual cost depends on the facts of each individual case, such as the existing state of the building. One potential issue is that often existing leases will not have been drafted to take into account how such potential costs will be dealt with between the parties. Of course, not all sustainability improvements require a large financial investment. A lot of progress can be made if the tenant makes some simple changes to the way it occupies the building, for example, turning off all lights if they are not absolutely necessary. What is fundamentally needed is a change in thought process regarding how the landlord and the tenant occupy a building.
How are Green Leases likely to impact Cayman?
The writer is not aware of any green leases that have been entered into in Cayman so this is a new area to consider. As Cayman currently lacks the environmental legislation that exists in a number of other jurisdictions there is no statutory incentive to consider green leases. The uptake of green leases therefore rests with how landlords and tenants on Island view their potential benefits. Whilst some of the new building in Cayman seeks to take environmental issues into account, it is hoped that some of the Cayman’s larger landlords and tenants will take the green lease initiative forward so that others will follow.