Green lease — environmentally-friendly provisions in lease contracts and their impact on landlords


Green lease — environmentally-friendly provisions in lease contracts and their impact on landlords

March 2023

Recently, environmental protection has been having an increasing impact on the operations of property businesses.

A study carried out by Deloitte Global in 20211 revealed that buildings account for over 40 percent of global annual CO2 emissions. Therefore, governments of EU member states put net zero emissions and sustainable buildings at the top of their strategies.

At the end of 2019, the European Commission presented its “Green Deal”, followed by resolutions to establish the framework for adopting environmental, social and governance standards in the EU member states.

On the 18th of June 2020, the European Parliament and the Council enacted the regulation on the establishment of a framework to facilitate sustainable investment (the so-called EU Taxonomy Regulation) which obliged economic operators in the European Union to ensure that their activities were sustainable and contributed to the EU environmental objectives, such as climate change mitigation and adaptation, sustainable use and protection of water and marine resources, cleaning up or managing pollution as well as protection and restoration of biodiversity and ecosystems.

Owners of commercial buildings and their tenants are increasingly accepting of the fact that environmental performance of buildings has become an integral part of business risk management.

What are “Green Buildings”?

The main assumption underlying the ESG strategy is introducing changes to improve the energy efficiency of buildings and reduce utility consumption. Some typical arrangements used by the owners of “green buildings” include: installation of separate meters, use of time schedules during the tenants’ working time, using energy saving light bulbs, implementing measures to minimise the amount of waste and use of recycling devices, improving the efficiency of water use and sewage disposal. Another characteristic that distinguishes “green buildings” are car-share schemes and bicycle racks to encourage the use of more environmentally-friendly transport to and from the building. This is not an exhaustive list: as new ESG regulations come into force and more sustainable technology is adopted in the EU member states, “green buildings” are being equipped with more and more innovations.

“Green clauses” in leases

So far, the Polish legislator has not laid down specific provisions to be included in “green leases” which primarily involve the landlord and the tenant working together.

In practice, “green leases” require the use of best efforts and bring in specific regulations that oblige the tenant to abide by the sustainability rules in the building or otherwise face the consequences provided for in the contract. There are three types of repercussions to be faced by the tenant that fails to comply with the provisions of the “green lease”: ordinary sanctions, such as: a demand that a tenant in breach of the provisions of the contract and the “green building” rules changes their conduct and remedy the damage; for example, if the landlord and the tenant agree on the rules for sorting waste by the tenant, but the tenant fails to comply with the arrangements, the landlord may seek reimbursement of the costs incurred; a specific amount of contractual penalties for infringement of the “green lease”, e.g. for furnishing the office with materials that do not meet the environmental standards agreed in the contract; as well as the landlord’s right to terminate the contract, if the tenant is seriously in breach of the contract.


ESG strategy and its impact on landlords

Existing buildings with poor environmental performance are becoming increasingly unappealing to potential tenants.

To satisfy the expectations of tenants, owners secure environmental certificates that confirm a sustainability strategy in place at the building. These include: LEED (Leadership in Energy and Environmental Design), DGNB (Deutsche Gesellschaft für Nachhaltiges Bauen — German Sustainable Building Council) and BREEAM (Building Research Establishment Environmental Assessment Method), ÖGNI (Österreichische Gesellschaft für Nachhaltige Immobilienwirtschaft — Austrian Society for Sustainable Real Estate), all issued following a multi-stage analysis and technical assessment of the building. With such certification awarded, an existing building becomes more appealing to the potential tenant who now has a source of information about the building and its condition. Properties with green certifications will be also interesting to tenants because “green” solutions, which have become a standard for the use of utilities, significantly reduce the running costs of the buildings, and these — with the current price hikes — can have a big impact on cost savings.

Moreover, with the legislative measures taken in the European Union, ESG has become an area of an increasing significance to the property market. The environmental objectives have caused the “green lease” to become all the more important to large property businesses. The EU CSRD (Corporate Sustainability Reporting Directive), which came into force on the 6th of January 2023, has extended the obligations to report the environmental impact of a business imposed by the Non-financial Reporting Directive (large public interest entities and those with more than 500 employees). The new disclosure obligations (e.g. sustainable development disclosures) will apply to all large entities with more than 250 employees and an annual turnover of €40 million, or with more than 250 employees and €20 million in total assets. The sustainability reporting obligation will also apply to non-EU companies with an annual turnover over €150 million in the EU and a branch in the EU. Member states have until the 6th of July 2024 to transpose the directive into their national laws.

Sustainable development impacts the financial sector as well. Presently, banks that assess the creditworthiness of borrowers, check whether those meet the sustainability requirements under the EU Taxonomy.

With poor ESG performance, a business will find it difficult to secure external financing, not only to make new acquisitions, but also to refinance its existing bank loans. Businesses have started incorporating taxonomy regulations into their sustainability reports. Once Poland transposes CSRD into its national laws, non-financial reporting will become mandatory for a greater number of entities. In future, entities that fail to comply or present ESG data will risk that their new investment projects will not be considered by banks for financing.
The majority of institutional investors active in the property market expect that by 2029 “green clauses” will have become commonplace in leases2. Non-compliance with ESG regulations may result in the plans to buy property or acquire a business being abandoned.


Future of “green lease”

Despite the absence of domestic regulations that would help enforce “green leases” in the Poland’s property market, an increasing number of tenants decide to work together with landlords to pursue an environmentally-friendly policy.

Considering the current global political attention to environmental issues as well as continuing legislative procedures in the European Union, one can conclude that the green approach to real property projects is not a passing trend, but the future of the industry.

1 DELOITTE’S SMART CITY SOLUTIONS CENTER “Urban future with a purpose” based on Coalition for Urban Transitions: Climate Emergency, Urban Opportunity (2019) and C40: Summary for Policy Makers. (2018);
2 A survey conducted by Savills Investment Management via PollRight between 24 June and 26 August 2019 among institutional investors with commercial property exposures across EMEA, North America and APAC.

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