On finance day at COP27 it’s impossible to not reflect on the role investment must have in our built environment’s transition to net zero. Strong financial incentives, and robust, reliable green investment will play a crucial role in dialling up the scale, and speed of our climate action. In this blog post, Nicky Knight and Emma Berry will discuss, when it comes to individual assets, who should be paying for these sustainability measures.
Nicky Knight – Head of Service Charge Consultancy at Avison Young – acts for occupiers who are concerned about rising costs in service charges
Emma Berry – Regional Head North West Property Management at Avison Young – acts for landlords exploring how to improve their assets.
Green approaches to constructing, managing and occupying buildings benefit all parties, so why hasn’t a mutually agreeable funding solution been found yet?
While the impact buildings have on the climate is well-established, how landlords and occupiers can effectively work towards shared sustainability goals can still present a challenge. Currently, while intentions are good, oftentimes, we still see each party assuming the other will fund green improvements or – before this stage is even reached – start the conversation. Where dialogue is being had, tangible outcomes are still sporadic. Engagement from both landlords and occupiers is needed as soon as possible to progress faster.
Landlords have rightly moved sustainability up the agenda and are examining their assets’ operational performance in more detail. As is often the case, the agenda is being further accelerated through legislation. Under MEES legislation from April 2023, lease renewals will begin to be captured by its provisions and must have a rating of over F or G. Consultations are ongoing to raise the EPC rating to a minimum of B by 2030.
The focus now should be on commercial retrofit and decarbonisation strategies to ensure the ongoing appeal of assets, as occupiers may otherwise consider moving to greener buildings at lease expiry or lease breaks. On top of this, with evolving legislation, the only way to ensure many assets stay legally lettable in future is to comply with ESG regulations. If landlords delay acting now, especially with the added pressures of labour shortages and rising material costs, they risk running out of time.
Sharing data and aligning goals and commitments is valuable here. We want to encourage behavioural and systemic change, which can be kickstarted by looking at building data and understanding where improvements can have the most impact. Occupiers have to be part of the conversation – engagement and agreement is needed.
Both parties can draw value from green initiatives – so who should be funding them?
Many of the sustainability initiatives being championed and progressed by landlords also have a clear positive outcome for occupiers, namely through reduced energy consumption, which given rising gas and electricity costs can make a real difference, as well as the overall benefit of helping support their own sustainability targets.
I think it’s reasonable to expect occupiers to fund such projects, at least partly, through the service charge if that benefit is being translated back to them. However, landlords should consider forward funding to reduce initial outlay on occupiers. It is also important that the benefit to occupiers is clear when seeking their buy-in.
This is where we may need to agree to disagree – at least in part! Legislation sits with the landlord – therefore shouldn’t they fund new initiatives? Improvements are often not a service charge item or even explicitly excluded under the lease, and also benefit the asset owner, so the landlord should be contributing towards funding.
However, there is no one size fits all approach. Factors to consider include length of lease, lease terms, benefits of proposed works and costs – recovery from the service charge needs to be evaluated on a case-by-case basis. But the assumption can’t be that green improvements are fully funded from the service charge.
How do leases need to evolve to support green initiatives?
We must remember these changes are for the common good. Perhaps a stubborn focus on protecting positions for each party around this topic is outdated – a collective move towards protecting our climate would be beneficial for all.
The structure of most current leases does not properly support the ESG conversation and that is something as an industry we should be looking to change by placing even more emphasis on early collaboration between landlords and occupiers.
Green lease clauses should be explored, not least because from a managing agent perspective they offer potential contractual support to sustainability initiatives. The BPP Commercial Model Lease, has some great examples including a co-operation clause, providing guidance on a range of matters, including environmental performance testing and costs of recovery of EPCs.
I agree that leases are currently not fit for purpose on ensuring green advancements. Separate communication and agreement are needed if tenants are expected to contribute or part-fund improvements.
What needs to happen next?
Actively seek discussions between landlord and occupier if they’re not being had already. Focus on initiatives with proven impact to avoid falling into a greenwashing trap or costly exercises with little benefits. Sustainability surveys for example tend to be a repeated expenditure, but without adequate analysis and a solid plan to implement changes, this becomes a tick-box exercise.
Landlords need to engage with occupiers from the outset; to learn their aspirations and ESG expectations for their own shareholders, employees or wider stakeholders – and then to be transparent and articulate the cost benefit around proposed initiatives in order to agree a strategy that also works for the occupier. I’d also recommend an early capture of data so occupiers can see both the challenges and the demonstrable benefits, which in turn helps support conversations on shared funding responsibilities and can enhance the building experience for users.
A common goal
The cliché of the landlord dictating to a tenant has never been more outdated than when we are considering the impact of climate change on our built environment. The UK Green Building Council benchmarks for 2030-35 are challenging and will not be achieved without collaboration. Working together, landlords, occupiers and building users can approach reducing emissions holistically, creating greener, more sustainable places that benefit us all.
This article is authored by employees of Avison Young.
To learn more about what Landlords and Occupiers can do next to accelerate the transition to net zero, explore the reflections from our Whole Life Carbon Roadmap Workshop that looked to answer this question.