Green clauses in lease agreements – ESG assumptions and sustainable development

Publication date: December 21, 2023

Issues and practical implications of the phenomenon of green clauses

In the area of the dynamically evolving legal and business space, the subject of reflection is the phenomenon of green clauses in lease agreements, which constitute a meeting point of innovative legal practices and sustainable development strategies. This article is aimed at a reliable analysis of this phenomenon, considering it in the context of the real estate market and its key participants. On the one hand, we face the challenge of adapting traditional legal practices to new realities, and on the other, we explore how these new realities can generate benefits for all participants in the real estate process. In the context of green clauses in lease agreements, practical implications may include, for example, the impact of these clauses on the relationship between the parties to the lease, changes in property management, financial implications for owners and tenants, or the long-term impact on property values.

Green Clauses in Lease Agreements.

Green clauses or leases are standard contracts that include additional provisions regarding ESG issues.

The so-called green clauses are included either directly in the contract or the parties create an additional annex in which they define the framework for cooperation in the sustainable use of real estate.

Green clauses in lease agreements represent an innovative approach to real estate transactions, based on the imperatives of sustainable development. In practice, these are clauses that aim to harmonize the interests of the owner, manager and tenant with ecological and social standards. By focusing on thoughtful and ethical real estate management, green clauses not only redefine the context of lease agreements, but also contribute to the long-term development of the sector, taking into account environmental and social aspects. In the pursuit of a sustainable future, green clauses become a compass, guiding legal interactions in the real estate sector towards ethically justified solutions.

Green clauses from the perspective of real estate owners and tenants. How green contracts affect real estate values.

For real estate tenants, green clauses are becoming an important criterion for choosing a premises. Social awareness is growing, and more and more companies are guided by the principles of sustainable development. Tenants expect not only financial savings resulting from energy efficiency, but also care for the environment, which is in line with contemporary trends. Experience shows that tenants are willing to pay higher rents for green properties, which becomes an incentive for owners to further invest in ecology, which improves the attractiveness of their properties on the market. Energy efficiency and therefore sustainable technologies resulting from green clauses lead to lower operating costs of real estate. Reducing energy and water consumption translates into lower bills, which in turn improves the profitability of the investment. Investing in green clauses also allows you to avoid possible punitive fees or restrictions resulting from the growing pressure on environmental protection. According to research conducted by Savills Investment Management, 73% of institutional investors expect that by 2029, green lease clauses will be widely introduced into contracts between tenants and real estate investment management companies.

While investments related to green practices may require an initial financial outlay, their long-term financial benefits are significant. Energy efficiency savings and greater property profitability can translate into profits over time. Properties with green certificates can achieve a higher market value, which means a higher value of the property in the sales process.

Certificates confirming the neutral impact of buildings on the environment.

Certificates confirming the neutral impact of buildings on the environment are official documents awarded to buildings that meet certain criteria of sustainable development and are environmentally friendly. These certificates are intended to confirm that a given building is managed with respect for ecological and social standards. Various aspects are assessed, such as energy efficiency, water consumption, building materials used, as well as technological innovations.

The most popular forms of ecological commercial certification of buildings in Poland are the BREEAM and LEED certification systems. Recently, the WELL certificate, which focuses mainly on the well-being of building users, is also gaining popularity.

WELL Building Standard:

WELL focuses on improving the health and well-being of building users.

The WELL standard covers seven categories, including air, water, light, mental comfort and innovation.

Example criteria: Measuring air quality, ensuring access to natural light, promoting healthy eating, creating a space conducive to physical activity. Properties that meet WELL standards are more attractive to tenants, which may result in higher rents and long-term financial benefits. Moreover, increased user satisfaction translates into a positive image of the building.

LEED (Leadership in Energy and Environmental Design):

LEED focuses on the sustainable design, construction and operation of buildings. The LEED system covers categories such as energy efficiency, indoor environmental quality, resources and materials, as well as social awareness.

Example criteria: Use of renewable energy sources, optimization of water efficiency, use of ecological building materials, availability of public transport. Being LEED certified demonstrates commitment to sustainable practices, which can attract investors, tenants and increase the market value of real estate.

BREEAM (Building Research Establishment Environmental Assessment Method):

BREEAM aims to assess and improve the sustainable design, construction and operation of buildings. The BREEAM standard covers categories such as governance, health and well-being, energy efficiency, transport, water, materials and pollution.

Example criteria: Use of renewable energy sources, reduction of pollutant emissions, effective water management, availability of public transport.

The BREEAM certificate confirms that the building meets high standards of sustainable development, which may translate into greater attractiveness on the market, as well as reduce operating costs and increase the value of the property.

HQE (Haute Qualité Environnementale):

HQE is the French standard for sustainable construction that emphasizes high environmental quality. The HQE standard covers eight categories, including management, health, comfort, energy, water, materials, environment and innovation.

Example criteria: Optimization of project management, improvement of indoor air quality, minimization of energy consumption, sustainable use of water, use of ecological building materials. Being HQE certified demonstrates commitment to sustainable construction practices, which can attract investors and tenants and increase the value of real estate on the French market.

DGNB (Deutsche Gesellschaft für Nachhaltiges Bauen):

DGNB is a German rating system for sustainable construction, focusing on ecological, social, economic and technical aspects.

The DGNB standard covers categories such as ecology, economy, society, technology.

Example criteria: Effective project management, minimizing environmental impact, sustainable resource management, improving the quality of life of users. The DGNB certificate confirms that the building has been assessed for sustainable practices. Having this certificate may increase the attractiveness of real estate for investors and tenants in the German real estate market.

The impact of green clauses on building financing:

The introduction of green clauses not only affects the value of the property itself, but also constitutes an element of a business strategy that brings economic benefits. Investments in sustainable projects are becoming more attractive for financial institutions. Banks and credit institutions often offer preferential financing conditions for projects that comply with green certification standards.

Owning a property with green clauses usually comes with lower long-term risk. Investments that take into account ecological aspects are more likely to maintain the value of the property in the long term.

Ensuring the Enforcement of Green Clauses in Lease Agreements

Green leases are not yet a common phenomenon, although to ensure that sustainable development practices are actually implemented, leases must include mechanisms and safeguards that encourage compliance with green standards. An example of such safeguards may be the introduction of monitoring systems that track and report on the achievement of sustainable development goals, enabling the maintenance of high standards. Regular audits may be used to assess compliance with contract provisions.

Lease agreements may also contain clauses specifying financial penalties in the event of failure to comply with the provisions of green clauses. Such sanctions encourage parties to diligently comply with sustainable standards. At the same time, agreements may provide for financial incentives if certain sustainable development goals are achieved or exceeded.

The context of green construction in the reconstruction of Ukraine

According to calculations by the Kyiv School of Economics based on reports submitted until November last year damage cases show that the documented damage to infrastructure alone due to war is estimated at almost USD 136 billion. At this stage of the war, losses in the energy sector and industrial infrastructure belonging to both private and state-owned companies dominate. The greatest damage in terms of value concerns residential infrastructure – houses, blocks of flats, housing estates. It is also worth mentioning that on June 20, 2023, the European Commission proposed the creation of a new financial instrument to support the reconstruction and modernization of Ukraine. The Facility for Ukraine will be a dedicated financial instrument that will provide consistent and predictable support to Ukraine for the period 2024-2027.

Green reconstruction of Ukraine

In the process of rebuilding Ukraine in line with green standards, there are a number of key goals that should be taken into account. The priority is to implement energy-saving solutions in the construction sector, which will contribute to sustainable development and reduce energy consumption. At the same time, the development of the energy sector based on renewable sources is an important step towards independence from Russian raw materials and the promotion of ecological practices. Technological progress in industry and decarbonization of agriculture are key elements that support the sustainable development goals. From an environmental perspective, nature conservation should be an integral part of the recovery plan, including the sustainable management of natural resources and the protection of biodiversity. In the area of transport, changes aimed at reducing greenhouse gas emissions are necessary. This means not only the development of public transport, but also encouraging the use of environmentally friendly means of transport and introducing modern solutions to minimize the negative impact on the ecosystem. The main goal in the EU today is to respond to the climate crisis. Europe wants to aspire to be the first climate-neutral continent, which it wants to achieve by 2050. The package of reforms introduced as part of the European Green Deal is expected to reduce net greenhouse gas emissions by at least 55% by 2030 compared to the level in 1990. Green and digital transformation are also expected to be the main driver of Europe’s economic recovery after the pandemic, as part of the Next Generation EU stimulus package. The consequences of the war in Ukraine, felt throughout Europe, seem to be accelerating the green transformation process, mainly due to the need to become independent from Russian fossil fuels. In connection with the implementation of the European Green Deal, changes to regulations are currently being developed that would introduce the obligation for all new buildings to be zero-emission from 2030. Buildings would need to be powered by renewable sources as much as possible and produce no on-site carbon dioxide emissions from fossil fuels.

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