Green lease agreements in the context of the Taxonomy Regulation


Raul Andriuc, Senior Associate

Green lease agreements in the context of the Taxonomy Regulation

The European Green Deal plan was adopted by the European Commission in December 2019 as an ambitious package of measures, ranging from reducing greenhouse gas emissions to investing in cutting-edge research and innovation, and conserving Europe's natural environment. Based on this, the European Commission has adopted three regulations that form the framework for the implementation of environmental, social and governance criteria, one of which is Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the "Taxonomy Regulation"), which provides that only those economic activities that significantly contribute to the achievement of environmental objectives are "green". The six relevant environmental objectives are: (i) climate change mitigation; (ii) climate change adaptation; (iii) the sustainable use and protection of water and marine resources; (iv) the transition to a circular economy; (v) pollution prevention and control; and (vi) the protection and restoration of biodiversity and ecosystems.

In this context, "green lease agreements" will be of major importance not only to financial market participants (who hold or lease such properties), for whom the application of the Taxonomy Regulation is mandatory, but also to financial institutions that finance real estate or various categories of owners, which should take a number of aspects into consideration, such as: (i) the expectation of higher rents when renting premises and modern, sustainable buildings often attracting higher-income tenants; (ii) the expectation of a higher purchase price when selling the property or more favourable financing conditions when financing the acquisition or development of a property; (iii) the intention to develop a property in order to transfer it later to an institutional investor, a situation in which both real estate certifications and green lease agreements can be very important; and (iv) the possibility of extending the applicability of the Taxonomy Regulation to other owners of properties in the future, etc.

Green lease agreements are lease agreements that aim to ensure the sustainable construction, use and maintenance of the property. Although there is no common European standard or a common definition of what a "green lease agreement" means, a number of clauses on several relevant aspects may appear in green lease agreements.

In connection with the use and management of the property, as well as supplying it with energy and other utilities, green lease agreements may give the landlord the right to have the building supplied with sustainable energy, such as electricity, heating, cooling and/or to use only sustainable cleaning products. Giving landlords this right under green lease agreements would be important because the cost of such products and of supplying the property with sustainable energy could be higher than for unsustainable products and unsustainable energy. It is also important that the lease agreement stipulates that the landlord can charge tenants higher costs in such a situation, thereby avoiding the risk that such higher costs will or can be challenged by the tenant. The lease agreements may also provide for the tenant's obligation to purchase sustainable energy (e.g. electricity) or sustainable cleaning products or the tenant's obligation to use its best efforts in this regard.

In addition, the lease agreements may oblige the tenant to: (i) collect waste separately, as far as possible, and/or (ii) use recyclable products, likewise as far as possible.

Moreover, the existence of a property sustainability guide could be useful to maintain or improve sustainability efforts for both landlords and tenants.

Regarding the construction, fit-out and maintenance works, before and during the construction of a property, several aspects can be foreseen by the owner to ensure the property is used sustainably by its tenants: the building could already offer sustainable heating or cooling facilities, separate waste collection facilities, storage areas for bicycles and electric bicycles or parking areas with electric charging facilities for vehicles. In the case of core-and-shell lease agreements, they could provide for the tenant's obligation to equip or arrange for the premises to be equipped with durable products only or the tenant could be obliged to use its best efforts to do so.

Regarding the exchange of data and information and monitoring, green lease agreements may include clauses obliging the parties to exchange data and information, in particular on the supply of energy, water and waste disposal, or data for determining the carbon dioxide balance of the leased premises. The lease agreements may also provide for the obligation to implement various monitoring concepts.

Of course, depending on each specific situation, there may be other clauses that should be considered in green lease agreements.

In conclusion, as green lease agreements begin to play an increasingly important role in the future, the owners of buildings and their tenants should consider the specific need for such "sustainable clauses" and to include such clauses in their lease agreements, as this aspect can have benefits both during the use of the buildings as well as in terms of financing or the expected sale of a property.