Written in green ink

Before the European Green Deal was approved, issues related to ESG (environment, social responsibility and corporate governance) were largely a marketing activity, motivated by the desire to achieve a competitive advantage and meet the expectations of investors. However, ESG is now becoming a matter of compliance, especially when it comes to the latest regulations. EU legislation on ESG is continually evolving – in particular, work is underway on the adoption of a directive that will increase sustainable development reporting requirements.

EU and national regulations on ESG are certainly set to have an impact on the real estate market. The objectives of the European Green Deal can be implemented in different ways at each stage of the real estate life-cycle: the preparation of the investment, the construction stage and (the longest of these phases) the use of the property. Green lease agreements can play a role in the transformation of the sector as a way of achieving environmental ESG targets during the building’s operation phase. A green lease requires or otherwise encourages both the landlord and the tenant to adopt certain approaches to reducing the building’s environmental impact.

Green leases will contribute to the achievement of sustainable development goals and will also have an influence on the volume of leases, vacancy levels and rental revenues, i.e. the indicators that investors are most interested in. Green leases are projected to allow landlords to expect higher rental rates as well as better financing conditions and increased prices when selling properties. Whether a building is sustainable or not is also becoming important for tenants, who have increasingly high expectations when it comes to energy efficiency and water management as well as the health and well-being of their employees.

Green provisions

In practice, we have been seeing the incorporation of green regulations into commercial leasing agreements in Poland for some time. But it is best to agree upon green clauses before concluding a new lease agreement, while it is also possible for the parties to amend existing ones. First of all, agreements may include general commitments whereby the parties are to adhere to sustainable development principles during the use of the building and in the course of conducting business activities, while also striving to reduce waste, energy and water consumption. Secondly, the parties can make more specific commitments, as discussed below. Lease agreements cover the permitted use of the premises. Usually, the landlord provides the tenant with the technical specifications, and in a green lease agreement these will additionally include: an environmental protection plan, a sustainable development / building use manual and a list of prohibited materials. The tenant may undertake to provide the landlord with ESG reports drawn up by the tenant or the tenant’s group, in order to immediately provide ESG data on its activities in the building, including (and in particular) on waste, emissions and information outlining the activities that confirm the tenant’s sustainable approach to the environment.

In addition, tenants and landlords can agree to more specific terms to ensure that environmental objectives are met. In particular, the landlord can be given the right to supply the building with sustainable energy and to stipulate how the electricity, heating, ventilation or cooling are used throughout the property. The landlord may insist that during the building’s operation only such means and equipment that meet the criteria for sustainable development are to be employed. It is important to address these issues properly in the lease agreement in order to avoid misunderstandings – for example, when it comes to the tenant paying the service charge. It is also vital to establish the tenant’s liability for waste.

On the other hand, if a green lease agreement specifies that the tenant has the right to carry out finishing work on the premises, it is worth reminding the tenant of its obligation to only do so using materials and construction techniques that meet the environmental criteria. It is best to precisely specify all of this in the agreement. The tenant should also be obliged to fit out the premises only with materials and devices that meet the sustainable development requirements. The tenant must be made aware of the need to carry out work and use the premises in a way that does not violate the requirements of the building’s eco-certificates. The tenant should also be given a list of prohibited materials. It is in the landlord’s interest to reserve the right to refuse permission for finishing work that could alter the energy performance of the building or have an adverse effect on its certificates or installations. Landlords and tenants can also agree on a green lease with conditions that require them to select suppliers, contractors and service providers to ensure that certain ESG objectives are met, e.g. by using specific products and maintenance methods in the property and that the green space is used in a manner that meets the environmental objectives.

The functioning of a green lease

It is worth setting out not only specific goals and obligations in a green lease agreement, but also the mechanisms under which both the landlord and tenant will be able to gain real benefits from using the property in a sustainable way. The parties may agree on various ways to share the costs of initiatives to meet the ESG objectives. For example, they may set a variable fee depending on the sustainable development goals achieved, to encourage the sustainable use of the real estate or oblige a party that does not meet the environmental objectives to cover certain costs. There could also be incentives for the tenant to reduce the consumption of utilities.

Importantly, green lease agreements should specify how data will be collected and monitored to meet the ESG objectives. Meters can be installed on the premises to gauge the tenant’s consumption of utilities, but the tenant may also provide the landlord with statements confirming that its use of the premises, as well as its suppliers, service providers and the manner that work is carried out, are consistent with sustainable development, including the landlord's environmental policy.

In addition to all this, it is worth stating in a green lease agreement how compliance with the specific goals and obligations of the parties will be monitored and what action is to be taken when the goals are not met. The tenant and the landlord can arrange to meet regularly to monitor and improve ESG activities. It is advisable to determine how the parties will proceed in the event of a dispute and how an outside expert is to be chosen, as the landlord’s or tenant’s right to terminate the lease contract or to reduce or increase the rent, or what specific action should be undertaken at the expense of the responsible party, may turn out to be excessive.

Each lease, depending on the circumstances, requires an individual approach to ensure that it is genuinely green and that the goals it sets out are actually achieved. The situation is different for certified buildings and those that only undergo refurbishment work to reduce their environmental impact during the lease period. According to research, investors are already focusing on ESG issues, and their appetite for taking over companies or buying real estate that meets ESG goals is set to grow. A negative ESG assessment could result in a decision to withdraw from a given property acquisition or that of a company. And as can be seen from the legislative activity in this field, ESG is clearly not just a temporary trend, but an area that will continue to gain in importance – especially for the real estate market.

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