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22.11.2021 | KPMG Law Insights

Developments in the real estate industry – Green Lease

Developments in the real estate industry – Green Lease

For some time now, the topic of green leasing has been present among stakeholders in the real estate industry. Probably everyone in the real estate industry has already had contact with corresponding rental and lease agreements. However, only very few green lease arrangements have yet become established as the standard in leasing practice. This is at odds with the increased focus on ecological, social and sustainable corporate management and investment strategy that has been observed in the German real estate industry in recent months in particular.

The paradigm shift is likely to be triggered by various regulatory activities of the European Union. The EU’s declared goal is to become the first climate-neutral continent by 2050. The EU has taken a significant step in this direction through the so-called Disclosure Regulation, which came into force on March 10, 2021; the Taxonomy Regulation and other legal acts have followed or will follow. The overarching goal of the Disclosure Regulation is to create transparency as to whether a product offered on the financial market is a sustainable product. This development will have consequential effects, also for the drafting of rental and lease agreements.

Significance of green leases

What is actually meant by the term “green lease” has not yet been defined by law. The Zentraler Immobilien Ausschuss e.V. (ZIA) considers a green lease to be a lease agreement that is geared toward sustainability and that, through its special design – possibly flanked by the requirements of any existing certification of the leased property – is intended to induce the tenant to use the property as sustainably as possible and the landlord to manage the property as sustainably as possible.

Control variants

So far, two groups of green lease schemes can be identified, the so-called basic green lease schemes and the extended green lease schemes. In the drafting of leases, the predominant practice at present is to adopt individual provisions of the basic variant, such as, in particular, regulations on

  • on sustainable use and management during ongoing operations, e.g. regulations on cleaning and waste, on the infrastructural integration of the rental property, on user mobility and on the further implementation of sustainability goals by the landlord, rarely by the tenant;
  • on energy consumption and emissions in the building operation and by the tenant’s operation, e.g. regulations on the exchange of data on energy consumption, on saving energy and drinking water, on promoting sustainable energy sources and on reducing emissions and waste;
  • on conservation and other construction measures, e.g. regulations on the ecologically sound implementation of such measures, for example by prohibiting the use of certain environmentally harmful building materials and requiring compliance with certain building ecology requirements in expansion and modernization measures.

In addition, the Extended Green Lease arrangements include in particular

  • Content additions to the aforementioned basic green lease regulations;
  • Object-specific additions in case of certification of the building;
  • Proposals to enforce green regulatory recommendations , for example, by passing on savings.

The Extended Green Leases are mostly aimed at parties that already have experience with green leases or want to demonstrate an extended commitment to pursuing sustainability goals.

As mentioned, the design practice is still very far away from the widespread use of Extended Green Leases. Even basic green lease provisions are not yet found in every clause of major project developers or investors. Only regulations on proper waste separation may already be understood as a Green Lease standard provision in many rental and lease agreements.

Clause design

When drafting green lease provisions, a distinction must be made as to whether they are individual agreements between the lease parties or unilaterally pre-formulated general terms and conditions within the meaning of Sections 305 et seq. BGB. Since only limited use can be made of literature and case law to date, it is advisable from a legal point of view to negotiate green lease arrangements on an individual basis. Admittedly, this is not practical, because for sustainable building use by all tenants or lessees, one will have to rely on similar regulations.

Insofar as rental agreement provisions are presented as general terms and conditions, it must be ensured that increased effectiveness requirements exist. If an appealed court finds that the non-user is unreasonably disadvantaged in deviation from statutory provisions, a provision may be qualified as invalid. The legal requirements then apply. In the case of such green lease arrangements, which provide for the assumption of costs by the tenant or lessee in the context of operating or ancillary costs, particularly careful clause drafting is required. The principle of economic efficiency must be strictly observed. Often, however, the environmentally best or most sustainable operation of a property is not the most cost-effective for the current occupant. In this case, cost limitations or other protective mechanisms for the tenant or lessee will probably have to be included in the contract to prevent the verdict of unreasonable disadvantage. By way of example, the Federal Court of Justice has ruled that the principle of economic efficiency denotes a contractual collateral duty on the part of the landlord to take into account a reasonable cost-benefit ratio when taking measures and decisions that have an influence on the amount of operating costs to be borne by the tenant; a breach of this collateral duty may lead to a claim for damages aimed at keeping the tenant free from the unnecessary costs.

Outlook

Currently, there is no direct legal obligation to imply green lease provisions in a lease or rental agreement. This cannot be ruled out for the future. In addition, the financial market regulatory processes that have already begun at the EU level and increasing social pressure on the real estate industry will mean that companies will have to pay more and more attention to the issue of sustainability in the leasing and management of real estate as well.

Hardly any other industry is recognized as having such outstanding potential to make an important contribution to climate protection and sustainability as the real estate sector. The development of an efficient ESG (Environmental Social Governance) concept will therefore become an indispensable building block for stakeholders in the real estate industry for future-oriented business. Sustainable investments require the creation of sustainable real estate, the ecological quality of which must be ensured not only through the use of environmentally compatible building materials in the relatively short planning and construction phase, but also through provisions for environmentally friendly and resource-conserving use during the decades-long operating phase. Rental, lease and facility management contracts are the regulatory venues for this, and green lease arrangements will become more prevalent.

We would be happy to support you in implementing an individual Green Lease concept that ensures the marketability of your new project development and the future viability of your real estate portfolio.

References:

ZIA Zentraler Immobilien Ausschuss e.V. Die Immobilienwirtschaft, Green Lease – der grüne Mietvertrag für Deutschland, 2nd edition 2018.

² ZIA, op. cit.

³ ZIA, op. cit.

BGH, judgment of November 28, 2007 – VIII ZR 243/06.

 

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