Mid-tier commercial buildings are hard to decarbonise. Now the City of Melbourne Net Zero Buildings Plan aims to support the sector to do better, with a toolkit for net zero model lease clauses.
Net zero or zero carbon ready leases are one of the enabling mechanisms identified by City of Melbourne in the Retrofit Melbourne Plan. More than 70 per cent of respondents to the initial plan consultation said they would be effective to help reduce the emissions of the building sector and meet the City’s 2040 zero emissions commitment.
The newly launched model Zero Carbon Lease clauses were developed through extensive consultation with industry including a workshop with 30 stakeholders across owners, tenants, leasing agents, sustainability consultants, energy efficiency researchers and legal experts.
The City’s Net Zero Buildings team also collaborated closely with NABERS to ensure a smooth integration of the rating scheme within the model, and with the Better Buildings Partnership to gain enhanced clarity on stakeholder interests.
Lawyers Minter Ellison and climate investment advisors Pollination provided legal and environmental expertise in the final drafting of the clauses, which aim to bring both landlord and tenants together in shared responsibility for enacting a decarbonisation pathway.
Democratising the decarbonisation tool
A user guide has also been developed, which explains the purpose of each part of the model lease clauses and the practicalities involved in implementation.
- Download the model clauses and user guide here
Dr Maria Panagiotidou, zero carbon buildings lead, City of Melbourne said the City had developed the Zero Carbon Lease – User Guide to help building owners and tenants work together to improve building performance and achieve carbon neutrality.
“These lease clauses provide a structured framework for setting clear expectations and fostering ongoing collaboration between landlords and tenants, driving progress toward net zero emissions in commercial buildings,” she said.
“Our aim is for the lease clauses to be accessible and practical for both top-tier and mid-tier markets, striking a balance between high aspirations and flexible implementation options.”
The gist and the goals
The clauses include both parties committing to activities and behaviours that lead to the a minimum rating of 5 Star NABERS Energy (or equivalent) for both the tenancy and the base building. This is the critical first step in a decarbonisation pathway – auditing performance and then undertaking energy efficiency activities to improve it.
The clauses also commit the landlord to planning for an electrification retrofit, to enable the building to be “net zero ready”, that is, capable of being powered entirely by renewable energy.
“Many (buildings) are at the early stages of their energy efficiency and sustainability journeys. The integrated Decarbonisation Plan clause within the lease allows landlords and tenants to jointly develop a tailored decarbonisation plan, offering a pathway for continuous improvement in building performance.”
The requirements include an understanding that not all buildings can immediately achieve net zero.
“In Melbourne, only a handful of such buildings exist in the CBD, while 67 per cent of large occupiers (over 5000 square metres), according to JLL research, have net zero carbon targets,” Panagiotidou said.
“These tenants are increasingly prioritising sustainability-focused leasing decisions, particularly following the introduction of regulatory requirements for climate-related financial reporting. The Zero Carbon Lease clauses are designed to bridge this gap, providing a shared framework for landlords and tenants to collaborate and make measurable progress on decarbonisation.”
Why JLL got involved
Consultants JLL played a key role in supporting the development of the Zero Carbon Leases. Ed Cotter, JLL director of strategic sustainability told The Fifth Estate that JLL had initially been engaged by the Better Buildings Partnership team in Sydney to develop a green leasing resource pack, which was launched early last year.
Cotter says that work was really focused around collaboration, building trust, and creating “partnerships between owners and occupiers for win-win scenarios”.
He and the team saw the work City of Melbourne was doing and recognised an opportunity to collaborate and learn.
“From my perspective, and from the team’s perspective, it’s always about building on what others have done, learning from that and sharing so that the industry can get better at what it’s actually doing.”
Evolving green leasing for the net zero age
While green leasing is not new, Cotter says the approach and how it is being implemented has “evolved quite a substantial amount” since the first potential green leases came to market 20 or more years ago.
Cotter identifies several advantages the new Zero Carbon leases can offer asset owners. The first is gaining a better understanding of what the tenant can contribute, and having the conversation about who will be responsible for what.
“So simple things like data sharing – even in this day and age, data sharing between tenants and landlords is always problematic,” he says. “Most of them have access to that information, but are they able to share it in real time? Are they share it quickly and readily and have that information contribute to, for example, a NABERS rating or a Green Star rating?
“Access to that sort of information at a very basic level is really, really important. But then you also get into a realm of what are the wants and requirements for a tenant, and for example, those that are employed by that tenant or that corporate.
“And that’s where it really starts to take that next step, especially with some of those mandatory disclosure requirements that have come into effect quite recently, and the changes to the commercial building disclosure requirements that we see coming down the railway track in the future.”
The benefits for landlords
He believes landlords can benefit from understanding that while there may not be immediate demand for their building to be all-electric and net zero, if a group of their tenants are looking for that in future, then the landlord has reason to start down the path of electrification and broader decarbonisation measures.
“I see the city of Melbourne’s clauses as a great step towards that, a really, really good model or an option.”
He says JLL looks at the net zero and electrification journey as a three-step process.
“We look at it as the earlier that you can have that conversation and identify a win-win scenario from both the landlord and the tenant, the better, so that you can align on some of those objectives, those broader ESG or net zero carbon objectives.
“The next step, in my mind is these green lease clauses, they sort of sit on the back end of this whole process…that’s the fundamental thing.
“It’s all about integrating those ESG objectives into the whole lease negotiation process.”
The third step is getting all the right people in the room to develop clear objectives and the path to the outcome. The room needs to include owners, tenants, leasing agents, property managers and sustainability experts, as well as legal input.
The market is shifting
Cotter believes the market is moving towards growing demand for leases that embed ESG, with drivers including the federal government net zero operational strategy and corporate targets for operational sustainability.
The reality is there is currently very little low emissions, all-electric, energy efficient space with a 5.5 or 6 Star NABERS rating, close to public transport and with excellent end of trip amenities available in the Melbourne market, according to JLL’s research.
Cotter says that means corporate tenants are going back into renegotiating.
“Putting other requirements into a lease arrangement becomes very important when we’re looking at a retrofit perspective on what are we going to do to actually improve the performance of our existing building stock?”
Scope 3 emissions are also entering into the picture, Cotter says.
“We’re seeing corporates already take this very, very seriously. Rather than go off and do a new development or a new build, they’re looking very, very closely at how they would go about doing a broader refurbishment of an existing asset. I think green leasing and Green Lease clauses, or net zero carbon clauses, become a really important part of that moving forward.”
It’s not just for Melbourne
The lease clauses and the user guide are being shared freely across the Australian property sector.
“This is not a challenge unique to Melbourne. Many cities across Australia face the same pressing need: the gap between the growing number of tenants with net zero targets and the limited availability of high-performing, zero-carbon-ready buildings,” Panagiotidou said.
As an increasing number of tenants look to boost their sustainability credentials and reduce their own emissions by occupying high-performing, sustainable and all-electric buildings, leases become a “pivotal opportunity to align tenancy decisions with net zero ambitions”.
Panagiotidou acknowledges the lease clauses are not the whole of the solution for improving the carbon performance of the sector.
While the lease clauses serve as a “catalyst for building performance improvements”, this tool must “work in tandem with the broader Retrofit Melbourne initiatives and complementary policies from the State and Federal Governments to effectively accelerate the sector’s retrofit rate.”
City of Melbourne is now seeking organisations to pilot the Zero Carbon Lease template clauses. To find out more, email the Zero Carbon Buildings team at zerocarbonbuildings@melbourne.vic.gov.au.
- JLL is hosting a free Green Leasing Masterclass on February 25, showcasing the Better Buildings Partnership Green Leasing Resources, and featuring Panagiotidou presenting on the Zero Carbon Lease model clauses. Register here.