Sara Wilkinson

Can we mitigate climate change and build urban resilience by adopting green leases in commercial properties, while adding value to assets? The answers appear to be yes to both, and moreover, Australia is leading the charge, writes Sara Wilkinson.

A UK/Australian study conducted by researchers from Oxford University, supported by expert advisors at UTS and the University of Reading, drew on information from the Sydney Better Buildings Partnership and found more than 60 per cent of all Sydney’s CBD leases contain “green” clauses – a fourfold increase since 2009.

Split incentives have challenged energy management in the rented office and retail sector where, under traditional leases, landlords do not benefit from improvements to energy and/or water efficiency. Can green leases solve the challenge of the split incentive?

A green lease generates a framework for landlords and tenants to attain and maintain energy efficiency and other sustainability goals during a lease term, on the premise that through the green lease improved economic and environmental performance ensues. Green leases include information about what environmental measures will be undertaken, how the parties will collaborate to achieve measures, who will monitor fulfilment of measures and what happens if the targets are unmet.

Clauses address environmental issues to varying degrees. For example, the lease may state requirements regarding energy efficiency. Traditionally, leases have not covered environmental considerations, partly due to conflicting landlord and tenant goals. However, the new study shows leases are changing to include clauses that increase cooperation, with landlords and tenants sharing environmental goals, that act as a “local law” to increase environmental accountability and opportunities. Green leases can be applied to new and existing buildings to improve performance.

Researchers from Oxford, Reading and Sydney universities examined five case studies in the Australia and the UK, where green leases were introduced in 2006, to understand how green leases are applied in office and retail property. The findings, published in international journal Building Research & Information, show green leases establish a framework for cooperation between the parties. Cooperation can include sharing energy data, setting improvement targets and, rarely, sharing costs for upgrades.

In Australia and the UK, green leases have higher rates of take up in offices rather than the retail sector. In both countries, adoption was landlord driven, although the federal government was a notable exception. The Sydney BBP published the BBP Leasing Index in December 2014 covering office leasing in the CBD. The index indicates green lease transformation in this market, increasing from 15 per cent of all leases having green clauses in 2009, to over 60 per cent in 2013.

The BBP analysed leases from the public register in NSW, using the Sydney BBP’s Model Lease Clauses to define “green” terms. About 500 of 7000 leases were sampled randomly depending on tenancy size and building quality. The leases were analysed for the presence of one of 22 MLCs and a grading system calculated a Model Lease Score. The grading was based on clause breadth and strength; that is, how binding the clause is.

Between 2008 and 2014, BBP found a four-fold increase of some forms of green leasing, and 27 per cent of the BBP MLCs appeared in standard commercial office leases. Not surprisingly, the top tier of the market experienced more take up – with over 80 per cent of leases having best practice leasing in 2013/14 in prime stock, and including 44 per cent of the MLCs. The most popular clauses related to cooperation, management and recycling, waste and consumption. Despite this growth, clause strength lags, indicating while parties agree to collaborative frameworks they hesitate to risk dispute resolution.

This study highlights the importance of landlord and intermediary leadership in green leasing, and illustrates the impact major landlords have had on traditional leasing practices, particularly in prime buildings. With the Sydney BBP, major Australian landlords have diffused a new form of governance of the landlord–tenant relationship and environmental practices into the Sydney office market.

Green leasing is a promising tool that tenants and landlords can use to develop joint environmental actions, with little or no involvement from government. It can foster greater cooperation in shared premises and help organisations achieve environmental goals. However, more research is needed to measure the outcomes of this approach,

The evidence shows that landlords and tenants in key Australian markets are valuing the enhanced reputation gains that green leases and greener buildings provide. Ongoing work by the BBP encourages the parties to sign up to a greater range and degree of enforceable green lease clauses that deliver greater benefits.

Although it is excellent that Australia leads the adoption of green leases, we should not rest on our laurels. The goal we should aim for is the increased adoption of enforceable “dark green” clauses in green leases. The property markets in the UK and Australia support BBP organisations and the study found the BBPs were key in fostering green lease activity in both countries. One highlighted area for future research is the need for an international standard for green leases.

This article is based on a free access, peer-reviewed research paper – The evolution of green leases: towards inter-organisational environmental governance – which describes the context, methods, findings and conclusions in more detail, and was written by Associate Professor Wilkinson, along with Dr Kathryn Janda (Environmental Change Institute, University of Oxford), Professor Susan Bright (Law Faculty, New College, University of Oxford), Julia Patrick (Environmental Change Institute, University of Oxford) and Professor Tim Dixon (University of Reading).

Associate Professor Sara Wilkinson is a chartered building surveyor and member of RICS and API based at the University of Technology Sydney.