Green leases and ESG clauses: from nicety to necessity 

Once considered a ‘nicety’, environmental provisions in a commercial lease are becoming increasingly prevalent as a tool for managing assets, regulatory risk and environmental, social and governance (ESG) objectives. Whilst green lease provisions are not mandatory, the regulatory landscape in England and Wales is placing greater emphasis on energy efficiency and sustainability to be considered in lease drafting. 

The Minimum Energy Efficiency Standards (MEES) currently prohibit the letting of most privately rented non-domestic properties with an EPC rating below E, unless a valid exemption applies. The Government has consulted on a future trajectory towards EPC B by 2030, although the final position has not yet been confirmed. 

Green leasing has therefore evolved beyond aspirational intent; it is becoming a key contractual mechanism in delivering ESG objectives, protecting real estate assets and allocating environmental responsibilities between landlord and tenant. 

ESG in leases 

Green leasing governs how a landlord and tenant can cooperate to improve the environmental performance of a property.  

Considering the ESG framework, green lease provisions aim to safeguard and enhance a property’s energy performance (the environmental limb), whilst also promoting data sharing and transparency, supporting compliance with regulation and reporting obligations (the governance limb).  

The Better Buildings Partnership (BBP) highlights varying levels of ‘green’ commitment that can be reflected in a lease: 

• Light green leases: voluntary, softer and more collaborative commitments.  

• Medium green leases: introduce more substantive provisions with greater legal effect and requiring reasonable cost and commitment.  

• Dark green leases: more onerous legally binding obligations, imposing significant commitment and costs.  

Key ESG clauses emerging in practice 

Drafting will vary from lease to lease, depending on the property, the parties’ objectives, the level of commitment required and its general terms. However, the following key principles commonly feature across commercial leases:  

1. EPC protection: tenants are often restricted from carrying out works that could adversely affect a property’s EPC rating.  

2. Recovery of improvement costs: landlords may seek to recover the cost of improving a property’s energy efficiency through service charge mechanisms where works could constitute a repair. This remains a key area of negotiation, particularly where works could be considered ‘improvements’ rather than ‘repairs’. 

3. Data sharing: tenants may be required to share data relating to energy, water or waste, and landlords may seek rights to install sub-metering or other monitoring systems to track usage and support reporting requirements.  

4. Cooperation on environmental certifications: parties may be required to cooperate in obtaining/maintaining environmental certifications (e.g., BREEAM ratings) 

5. Sustainable alterations: alteration provisions may require the tenant to use sustainable materials or to comply with specified environmental standards.  

Commercial and legal tensions 

Despite their increasing prevalence, ESG clauses continue to present a number of practical and legal challenges: 

1. Costs allocation: who bears the cost continues to be heavily negotiated, giving rise to the ‘split incentive problem’, whereby the party funding the works does not directly benefit. This could create potential misalignment between landlord and tenant interests. 

2. Regulatory uncertainty: the Government continues to consult on the regulatory reform of MEES meaning the final position has not been confirmed. Lease drafting therefore becomes difficult where parties are seeking to address future standards without imposing obligations that are too uncertain, onerous or quickly outdated. 

3. Enforceability vs. flexibility: whilst landlords may seek onerous clauses to safeguard their asset value and comply with ESG requirements, these obligations are unattractive and often resisted. Stricter drafting can provide certainty and enforceability, but flexible or aspirational wording may be harder to manage and enforce in practice. 

Market directions and risk allocation  

ESG clauses and green leases are becoming the market norm – commercial landlords with significant portfolios and tenants with sustainability objectives are setting market expectations. Poor environmental performance can create both letting and valuation risk, placing pressure on landlords to incorporate ESG mechanisms into leases.

In response, landlords may seek to manage MEES and wider decarbonisation risk through lease drafting, including restrictions on alterations, and by recovering sustainability costs through a service charge. However, this raises concerns around fairness and value for tenants, especially those with shorter occupational interests or budgetary constraints.

There is a move towards standardisation in the market. The BBP Green Lease Toolkit has been developed to assist landlords and tenants in structuring sustainability provisions. This evidences a market shift into clearer and consistent drafting approaches, rather than aspirational inconsistently applied ESG provisions.

The Birketts view 

It is no longer a question of whether ESG clauses should be incorporated into a lease, but a question of how far parties to a lease should go in agreeing them. As government policy evolves and regulation tightens, careful drafting and negotiation will be essential.  

For landlords, these provisions can help protect asset value, support regulatory compliance and safeguard portfolios. For tenants, the focus remains on ensuring obligations are proportionate and commercially realistic. In practice, the challenge lies in allocating the risk whilst ensuring ESG clauses are enforceable, clear and commercially workable.