Environmental Considerations for Commercial Landlords in Ireland – Sink or Swim
The Crisis
News bulletins today are awash with stories of raging cyclones, record heatwaves and roaring wildfires.
Recently here in Ireland, Storm Betty wreaked havoc upon our landscapes and coastal areas. In response to these climate change events; corporations are becoming hyper-focused on improving their Environmental Social and Governance (ESG) credentials.
As a hugely significant polluter, the real estate sector must act rapidly given the existential threat faced by the planet. Behaviour must change. Not only because it is necessary for the future of our species but also because it is the financially prudent thing to do.
Environmental regulation is being introduced across the globe. Regulation that will only increase over time in the race to net-zero. Investors who do not consider the environment when accruing an interest in property will ultimately lose out to those who do.
In this article, we’ll set out why commercial landlords must change how they go about their business, what positive steps they can take, and finally, how these steps will add value to their assets.
Sector Issues – why action is needed
The real estate sector is a major carbonising force. And it’s going to come into even greater focus for environmental policy makers in the very near future.
The built environment is responsible for almost 40% of global greenhouse gas emissions, that’s according to the World Green Building Council.
11% of those emissions come from embodied carbon, carbon emitted in the construction of buildings; 28% come from the day-to-day operation of buildings.
As the European economy pushes towards decarbonisation, the sector will come under increasing scrutiny and greater pressure to pursue lower carbon outcomes.
Regulation – on the rise and set to tighten
Regulation to encourage more environmentally-friendly behaviour in the real estate sector has already been introduced and is expected to increase over time.
For example, here in Ireland state lending institutions such as the Housing Finance Agency refuse to finance new residential developments if units are not A-rated under the Building Energy Rating (BER).
Our nearest neighbour, the United Kingdom, has banned continuing to lease properties with an Energy Performance Certificate, the UK’s equivalent of BER, with a rating any worse than E, with limited exceptions, as of 1 April 2023. In the event that Irish legislators choose to follow suit in the near future, landlords must be prepared.
At European level, greater regulation is being brought through at a rate of knots.
The EU Taxonomy for Sustainable Activities prohibits products marketing themselves as sustainable investments unless they meet specific criteria around climate-impact and resource-management.
These existing measures, and the prospect of further regulation and legislation coming down the tracks, are pushing interested parties away from property investments that might be deemed unsustainable.
For example, vendors are finding it very hard to sell office space in redbrick Georgian properties in Dublin due to these buildings’ poor energy ratings.1 This is often despite these assets being sold with the benefit of a long-term occupational tenant. Tenants with clear ESG targets seeking office or retail space will not take leases on buildings with a poor BER.
Not only would such ratings affect their own environmental targets but they may also affect a tenant employer’s ability to attract and retain talent. Young professionals tend to be particularly climate-conscious. Sustainable workspaces with bike racks, charging stations for electric vehicles (EV), and clear carbon-reducing policies are strong pull-factors for prospective employees.
What does this mean for real estate investors?
Excitingly for commercial landlords, there is much that can be done to future-proof assets and to help the built environment to positively contribute to the battle against climate change.
Properties can be retrofitted to better their sustainability ratings, thus making them more attractive to potential buyers and tenants alike. Renovations have allowed many redbrick buildings in Dublin’s Georgian core to maintain their pretty facades while undergoing comprehensive works behind the scenes to render them as environmentally-friendly as possible. Some have even achieved A ratings2. These spaces are now among the most sought-after office spaces in the city for tenants.
It is not only historical buildings that are evolving to ride this green wave.
Dublin has seen recent examples of landlords and tenants with a long-term relationship agreeing to expand and refurbish the tenant’s headquarters to give the tenant greater space and to make the property as sustainable as possible. Such an approach benefits the credentials of both parties.
Green Leasing
Landlords and tenants can agree to certain conditions in leases to make their tenancies as ESG-compliant as possible. These “green lease” clauses usually contain provisions around obligations by both parties to cooperate to ensure the maintenance, or even to bring about the improvement, of the energy rating of the let premises.
They often provide for a collaborative approach between lessor and lessee around consumption of energy and water, waste management and recycling, and sharing of environmental data.
How to take action?
Commercial landlords need to act now to ensure they stay head of the changes we’ve seen. Lawyers are coming together to make this transition to a green economy easier for clients.
For example, the Chancery Lane Project describes itself as the largest global network of lawyers and business leaders using the power of climate contracting to deliver fast and fair decarbonisation. The project has written over 100 climate clauses and over 70 glossary terms. It provides a toolkit to help businesses decarbonise their contracts. These clauses are freely available online. A suite of Irish green lease clauses is available on the project’s website.
As blue-chip tenants demand the inclusion of these clauses in new and existing leases, it is expected that they will become the market standard. Evidently, there is hope for the real estate sector with so much innovative activity taking place.
Prudent landlords should not only seek to acquire new assets with excellent energy ratings but should also endeavour to renovate existing older assets to improve their BER.
Further environmentally progressive steps can be taken including the provision of EV-charging facilities. These premises will become more attractive to forward-thinking tenants as a result and will provide secure income for landlords.
Green provisions should always be included in leases for new tenancies and on top of this, landlords should be encouraged to vary the terms of ongoing leases to make them more environmentally friendly. A collaborative approach with tenants can lead to the improvement of both parties’ ESG credentials.
Sink or Swim
In a rapidly-changing world with melting polar ice caps, commercial landlords can choose to sink or swim.
Those who continue to spend money on greenhouse gas-emitting property will face into a future of depreciating asset values, sanctioning by national and international bodies, and difficulty in obtaining financial backing.
Conversely, those who embrace green investing can expect their assets to appreciate in value, can look forward to cheaper financing of projects, and can market themselves as sustainable actors in the space. It’s time for the key players in the real estate sector to welcome environmentally-friendly developments.
The planet and their wallets will thank them for it.
1 A high-profile Georgian building with the benefit of a long-term lease from a blue chip client has recently had to reduce its asking price by close to 30% as a result of an inability to find a buyer. The relatively poor BER for this property is no doubt a contributing factor to its lack of attractiveness to prospective purchasers.
2 A redbrick Georgian-entranced office space in the centre of Dublin recently secured a number of high-profile blue chip tenants on the back of its refurbishment and A3 rating.
