SUSTAINABILITY PART 3


RESIDENTIAL LEASES In the residential sector the argument is much less defined and developed. The primary sticking point is the landlord currently has little incentive to pay for the installation of energy efficiencies when he himself won’t benefit from the savings i.e. the tenant pays the utility bills and as yet there is no perceived increase rental yield for higher energy efficient homes. Furthermore, Assured Shorthold Tenancy agreements don’t incentivise the landlord to invest in his tenant unlike commercial green leases where the nature of longer-term leases provides investor and tenant ROI. Legislation to compel private landlords


to improve their inventory’s energy performance is currently limited. In England and Wales, from 1 October 2008, social and private landlords are required to provide a landlords’ Energy Performance Certificate (EPC) for all rental properties with a new tenancy. The EPC must be made available free of charge to prospective tenants before any contract is entered into. There is a fine for non-compliance. EPC’s are not required for any property that was occupied before 1 October 2008 and which continues to be occupied after that date by the same tenant. The game changing piece of legislation


impacting private landlords is the Energy Act 2011, which has a provision that states from 2018 a property with an EPC rating lower than ‘E’ will not be legally allowed to be rented. The Government estimates that over 680,000 rented properties are currently ‘F’ and ‘G’ rated and so will be affected. Landlords will have the opportunity to


improve the energy efficiency of their properties at no upfront cost via the new Green Deal initiative. The Green Deal is listed to be introduced in October 2012. A loan against the property, which would be repaid through a levy added to utility bills, will be the market mechanism. In a recent poll, The National Landlords


GREEN LEASES – THE LEGAL BRIEF


Michael Fahy, head of commercial property at Steeles Law, outlined what green clauses might typically appear in a lease, the perceived problems, solutions and benefi ts.


• •


• • Clauses


1. Repair: The tenant should use materials from sustainable resources so far as practicable.


2. Service charge: The


landlord will be entitled to have regard to the cost of environmental good practice.


3. Tenant fi t-out: The


tenant will be required to use materials from sustainable resources that are approved by the landlord.


4. Sharing of


information: The tenant may be required to share information with the landlord on its plans for improving energy effi ciency. This can be organised in a variety of ways, for instance through a formalised Committee (comprising the landlord and tenant) or simply informally informing the landlord of details of any changes implemented by the tenant for reducing energy use.


•


Perceived problems 1. Cost: the additional


costs involved in reducing the carbon footprint derive from a range of possible improvements in buildings, operations and management. Environmentally friendly obligations can be imposed on a tenant relating to, for instance,


•


waste disposal, recycling and use of specifi c types of cleaning products that comply with environmental policies. For the landlord, the costs involve the initial expense of setting up an environmentally effi cient system and the loss of a potential tenant who may be deterred to enter a lease due to the costs (in the form of increased rent and service charge) passed on from the landlord to achieve energy effi ciency. 2. Uncertainty. This can


•


arise in two ways. The covenants imposed on the tenant may be too vague (eg ‘to cooperate with the landlord to improve energy effi ciency’) and so there is uncertainty regarding whether a breach has occurred. Secondly, the potential costs to the tenant of certain green clauses may be unclear in the initial stages of the term.


3. Time: The landlord producing and the tenant


Association found that a quarter of landlords would definitely take advantage of the Green Deal while a


further 38 per cent would consider it. Some 21 per cent of landlords surveyed said they were unsure about the deal while 17 per cent said it had no appeal.


A green roof is a good start but there are many other measures to take!


20 MARCH 2012 PROPERTYdrum


complying with energy effi cient policies will take up time and resources that could be used elsewhere in the business.


•


Solutions and benefits


1. Ultimate increased


• •


profi tability for both landlords and tenants: Initial costs of setting up environmentally friendly practices should be outweighed by future signifi cant reductions in costs from, for instance, lower electricity bills and reduced service charges from more effi cient buildings.


2. Improved reputation:


Benefi cial to companies to strengthen their corporate social responsibility image. 3. Looking to the future:


Green leases will undoubtedly become increasingly common with certain obligations, probably becoming mandatory, required by future legislation designed to achieve the government aim of reducing greenhouse gas emissions by 80% by 2050. There is already some sign of this with the introduction of the Carbon Reduction Commitment in April 2010.


Gordon Miller is Co-founder and Sustainability & Communications Director of Sustain Worldwide (www. sustainworldwide.com).


David Salusbury, NLA Chairman, said,


“The scheme guarantees tenants lower utility bills while providing them with warmer homes and landlords will benefit from long-term improvements to their properties. It’s pleasing to see that two- thirds of landlords are considering using the Green Deal to improve their properties when grants become available next year, but the actual cost of these improvements will be a key factor.”


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