UK/US ESG Real Estate Update

Chapter 1 Green Leasing in the US

Green lease provisions in the UK are increasingly being incorporated in leases, across all asset classes. In this article Trevor Adler from our New York office sets out some thoughts on how green lease clauses are progressing in the U.S., the types of green lease provisions we are seeing and common tenant issues.

Background

Green lease provisions are being added with increasing frequency in U.S. leases, especially in lease forms of larger and more sophisticated owners. For example, major owners of industrial spaces throughout the U.S. represented by Hogan Lovells have been adding green lease provisions. Tenants, including national corporations that Hogan Lovells represents in lease transactions, have been accepting them.

What types of green lease provisions are we seeing?

Some examples of the types of green lease provisions that might be included are:

• Acknowledgements by the tenant that the landlord has or may be required in the future to:
  • adopt energy, water, and waste efficiency, and other environmentally sustainable practices; and
  • adhere to sustainability monitoring and certification and/or rating programs.
• Rights of the landlord:
  • to install on-site power generation (i.e., solar or small wind) and/or storage (batteries) at the leased premises (so long as such installation does not interfere with Tenant’s use of the leased premises).
• Tenant responsibilities / obligations:
  • to reasonably cooperate with any of the above if requested by landlord, including data reporting on energy consumption for any utility billed directly to the tenant or billed by submeter (if the landlord does not have access to the submeter usage data);
  • to deliver commercially reasonable written releases evidencing the tenant’s consent to deliver energy consumption data to the landlord, and the tenant’s agreement to install smart meters;
  • to follow local waste sorting and recycling programs, and to provide copies of waste manifests, to the extent prepared by the tenant, for all waste that leaves the leased premises that is within the tenant’s control; and
  • to pay for its equitable share of building emissions and/or energy efficiency costs and penalties, and/or for capital improvements to the building to reduce any such costs and penalties, resulting from laws enacted in certain U.S. cities and states. Currently, building emissions and energy efficiency laws have been enacted statewide and/or in select cities in Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania and Texas.
• Building design and operation:
  • a requirement that all lighting within the leased premises will be energy efficient lighting (i.e., compact fluorescent lamps (CFLs) or light emitting diodes (LEDs)), and any requirements regarding indoor air quality;
  • Agreement of the landlord to use commercially reasonable efforts to provide the tenant with the building’s ENERGY STAR score annually; and
  • a pledge from the tenant to prioritize using materials in its construction of the leased premises that meet the sustainable criteria including: (i) being manufactured from recycled or renewable materials; (ii) being biodegradable or recyclable; (iii) having recyclable or reusable packaging that is comprised of few materials; (iv) being energy efficient; and (v) being backed by trustworthy, environmentally conscientious labeling programs.

Tenant issues

The most common issues identified by tenants relating to green lease provisions pertain to costs and privacy. Some tenants are concerned that complying with sustainability practices, or using sustainable materials in their alterations, will increase costs beyond what they were anticipated for their occupancy. Other tenants worry that installing environmental sensors or energy monitoring devices will result in privacy concerns, such as what else is being monitored by these devices, how the tenant’s operations are being tracked, and who will have access to the data.

Chapter 2 Rooftop Solar - a toolkit for landlords and tenants

In this piece Paul Stones provides a brief snapshot of how rooftop solar arrays are being dealt with in the landlord and tenant market.

While we often associate solar panels with homes, businesses are turning to renewable alternatives to power their properties. While electricity costs remain volatile, one of the ways environmentally aware landlords and energy hungry tenants can hedge against price fluctuations is by installing rooftop solar arrays. As a result, we are seeing more landlords investigating installation opportunities with the intention of supplying electricity directly to their tenants.

Financially for a landlord this can be quite attractive. We are seeing returns on investment typically aimed at the 7-to-10-year region. The landlord would typically pay for the installation and recover the cost by charging the tenant for the solar generated electricity that it consumes.

A pricing mechanism can ensure the solar price floats at a margin beneath the mains grid price so the tenant is always incentivised to draw power from the solar array. The landlord will recover the cost either as a utility charge or factored into the lease as an additional rent. The parties should however avoid any discussions of exclusivity as it will be necessary for a tenant to maintain a grid connection to cover any gaps in the solar supply.

Any solar surplus can be sold to the grid however there may be a greater price incentive for tenants to soak up additional power by the installation of electric vehicle charge points for their own vehicle fleet or battery storage for discharge at peak times. Certain funds acting as landlords should also consider their tax liabilities in case any significant supply to the grid outside of their property undertaking affects their tax position.

The mechanics of the proposal will need to dovetail with any new or existing lease arrangements. For a landlord installation consideration must be given as to whether the roof structure been demised to the tenant and who controls the airspace above. A tenant will no doubt expect any enhanced insurance costs, maintenance, repairing or reinstatement obligation to remain with the landlord. Care must be exercised to ensure the installation doesn’t invalidate any roof warranties although mounting the array on racking systems has proven to be a way of minimising roof penetrations. Tenants are also keen to ensure their alienation opportunities are not adversely affected. Recovering the power costs under the lease means the obligation continues under an assignment, however where the parties enter a separate power purchase agreement, care should be taken that imposing a new agreement as a condition of assignment doesn’t fall foul of s19(1A) of the Landlord and Tenant Act 1927. It may after all prove essential for a landlord to ensure the continuity of tenant supply.

The first legal step is to consider the lease and we recommend to our clients they do this early in the scoping phase as it may be critical to both the installation and to the ongoing supply relationship. Please reach out to Paul Stones if you would like further information on this.

Chapter 3 The EPC reformation in England and Wales - changes on the horizon

In this piece Adam Balfour looks at reform to EPCs. From 4 December 2024 to 26 February 2025, the Ministry of Housing, Communities and Local Government and the Department for Energy Security and Net Zero ran a consultation seeking views on the reform of the Energy Performance of Buildings (“EPB”) framework in England and Wales. So what changes are coming down the line?

The EPB framework was established under the Energy Performance of Buildings (England and Wales) Regulations 2012 and is one of the key legislative tools promoting carbon reduction in building stock and promoting energy efficiency improvements in commercial and domestic properties across England and Wales, forming part of the wider objective of reaching net-zero emissions by 2050.

The proposed reforms would impact energy performance certificates (“EPCs”), display energy certificates and air conditioning inspection reports.

Reform to EPCs is significant, as they form the basis for energy efficiency targets, regulatory requirements for minimum energy efficiency standards (“MEES”), and funding criteria. The proposals include:

• Multiple metrics – at present, whilst EPCs display various metrics about environmental performance, there is a “headline” metric (an Energy Efficiency Rating modelled on energy costs per sq m for domestic property; an Environmental Impact Rating modelled on carbon dioxide emissions per sq m for commercial property) expressed in the familiar A – G scale. The Government has acknowledged that these headline metrics are flawed (as they can be significantly influenced by factors outside the building owner’s control). Under the proposals, multiple metrics would be used to provide a wider range of better quality performance data to ultimately give a better representation of a building’s energy performance:
  • Fabric performance - assessing the thermal performance of the building’s envelope
  • Energy cost –the financial implications of the building’s energy efficiency and potential improvements
  • Heating system - information on the efficiency and environmental impact of the building’s heating source
  • Smart readiness - assessing the building’s potential to integrate smart technologies that can optimise energy consumption

(The above would form four headline metrics for domestic property)

• Carbon – the carbon emissions from the energy used in the building (this would remain the headline metric for commercial property, although this may change over time)
• Energy use – showing overall energy consumption and identifying areas for energy efficiency improvements

These changes are anticipated to be introduced in the second half of 2026. At present, there is no suggestion that changes to EPC metrics would invalidate existing EPCs which could continue to be used to demonstrate compliance with regulatory requirements.

The Government has also left the door open for additional updates in the future, including metrics to show a building’s resilience to climate change impacts, occupant health and wellbeing, biodiversity, and water efficiency.

• Reducing EPC validity period - the current 10-year EPC validity period could be reduced (by over 8 years has even been suggested!) The Government’s preference is that all existing EPCs would remain valid for their existing validity period, and any reduced validity period would only apply to new EPCs.
• Requiring a valid EPC throughout a tenancy – the Government has recognised that, because EPCs only need to be produced in limited circumstances, there are often instances of EPCs not needing to be renewed when they expire (and which brings properties outside the scope of the MEES regime, for example). To address this, a new EPC would need to be commissioned for a let property when the existing EPC expires (which would mean more properties are subject to MEES).
• Listed buildings – the Government appears to acknowledge that EPB Regulation 5(1)(a) is, at best, confusing. Under the changes, all heritage buildings would be required to have an EPC. This would bring listed buildings within the scope of MEES (although exemptions may be available).
• Compliance and penalties - given the limited evidence on compliance with the energy efficiency regimes, there may be changes to the relevant enforcement agency’s access to data, and increased penalties (which have remained stagnant since their introduction in 2007).

The Government is expected to release its response to the consultation in mid-2025, so watch this space. Also look out for our next article (below) which considers changes to MEES for private rented homes.

Chapter 4 Changes to MEES for private rented homes in England and Wales

In this piece Adam Balfour considers the key proposals in the latest consultation on MEES. Following the 2020 consultation (the results of which were not published) under Boris Johnson’s premiership, on 7 February 2025 the Government launched a new consultation on improving energy performance for privately rented homes in England and Wales.

Whilst this is part of the Government’s net-zero mission, fuel poverty is also a big driver behind the proposed changes: ~24% of private rent homes in England are deemed to be “fuel poor”, and improving the energy efficiency of these properties will ultimately reduce energy bills. This consultation is closely linked to the 2024 EPC reform consultation (see “The EPC reformation in England and Wales” above), and the proposed changes to the EPC regulations inform this consultation.

The key proposals in the privately rented homes consultation include:

• Raising the minimum energy efficiency standard required for privately rented homes from an EPC rating of E to a new minimum of C
• This new higher minimum standard would be phased in: it would apply to new tenancies from 2028, and all tenancies by 2030 (the previous implementation window of 2025 -2028 is no longer considered realistic)
• Following the proposed changes to the EPC regulations, landlords should prioritise meeting the “fabric performance” metric (which, the Government posits, would likely require similar improvement measures as achieving an EPC C rating under current EPCs) above other proposed metrics
• Landlords would be required to invest up to a maximum of £15,000 per substandard property on energy efficiency improvements, after which an exemption would be available if the property still failed to meet the minimum standard
• Private rented homes that have an EPC C rating under an existing EPC would be considered compliant under MEES until that EPC expires
• Following the proposed EPC regulation reforms expected in 2026, properties that remain below EPC C under their existing EPCs would need to commission a new EPC when they become subject to the requirement for a higher standard (in 2028 or 2030 as applicable) before taking action to comply with the higher standard

Stakeholder views on these topics are due by 2 May 2025. You can find the consultation and ways to respond here.

Chapter 5 Green Lease clauses - call for evidence

Chris Somorjay gives a timely update on the Green Lease Toolkit. It is now a little over a year since the Better Buildings Partnership launched their new, heavily revised and updated Green Lease Toolkit (GREEN LEASE TOOLKIT | Better Buildings Partnership). The BBP are very keen to receive feedback and to understand how widely the new toolkit is being adopted – or indeed about barriers to adoption. A number of our clients have been reviewing their standard forms of lease in order to incorporate Green Lease Toolkit clauses. If you are aware of a client who:

• would be interested in undertaking a similar exercise; or
• would like to learn more about the Toolkit; or
• has any feedback in relation to the Toolkit,

Please contact Chris Somorjay, who sits on the BBP Green Lease Toolkit Legal Working Group.

Our latest ESG training to clients

The team is always happy to give clients updates on any topics they would find useful, recent examples include the new Planning and Infrastructure Bill and Green Lease Clauses in 1954 Act Lease Renewals.