The Growing Importance of the Green Lease

Sustainability has been on the mind of occupiers to varying degrees for many decades, but over the past five years in particular it has become a bigger priority and it will continue to grow in importance as mandatory sustainability reporting continues to come into effect.

Mandatory sustainability reporting is a requirement for Australian businesses to provide audit-ready data on their emissions, with the compulsory climate-related disclosures to affect all businesses via a phased-in approach until the 2028 financial year.

Knight Frank’s latest Australian & New Zealand edition of their (Y)OUR SPACE report, which delves into the evolving needs of occupiers and workplace, found sustainability is in the top five of most corporate’s agenda when it comes to real estate. ‘Aligning real estate and ESG strategy’ was identified by 37.5% of respondents as one of the top five challenges in delivering effective corporate real estate strategy over the next three years. It came in behind ‘enhancing the workplace experience’ (54%) and ‘reducing the cost of real estate’ (50%) and was equal with ‘delivering collaborative and agile workspace’.

The report also found that more than 95% of respondents said that sustainability considerations would influence their real estate portfolio and strategy over the next 3 years, with 67% already having stated net zero carbon emissions target for their business.

So it’s clear many organisations are putting the sustainability element of ESG higher on their agendas and questioning how the real estate they are occupying is going to impact their goals. When considering sustainability targets, the occupier should consider not only what they can do within their own tenancy, but also what is the landlord targeting or achieving from a base building perspective.

If you are an organisation prioritising sustainability, the challenge is how you approach it in your real estate negotiations and decisions, particularly if you’re on a budget. Here’s our advice on where to start.

First things first – ask for a green lease

If sustainability sits high on your agenda and you’re in a building that isn’t displaying the highest environmental credentials and doesn’t appear to have an agenda to improve its green credentials, you have two options – relocate or take a ‘sustainability first’ approach with the landlord.
The ‘sustainability first’ approach means that before talking dollars with a landlord, you should first come to an agreement about what the future looks like with regards to sustainability in the building. This seems contrary for people with a tight budget, however, the landlord needs to understand the importance your organisation is placing on this objective.

Some landlords have a green lease as part of their standard lease – that is, they will have a sustainability portion in their standard lease, which is a good framework around how the parties will work together to improve the building’s sustainability over time. Having visibility of the baseline data, being provided with ongoing reporting, and then achieving measurable improvements are critical for a green lease to be useful and effective.

While historically a green lease has only been an agreed commitment to work together to improve sustainability, rather than tying either party to tangible measures, the new mandatory reporting will mean that there is a greater imperative for both landlords and tenants to make measurable commitments to improvement.
If you find yourself in a building with no green lease, and you have no clear understanding of what the landlord is doing to improve the asset relative to sustainability, then it may be imperative to your business that you collaborate with your landlord now and identify what the road map to improvement looks like.

What else can occupiers do to improve sustainability?

Ask what your landlord can do for you, but also determine what you can do for yourself to reach your sustainability goals.

First of all, you should have a vision or a map of how to reach your sustainability goals and to do that you need to determine your baseline for your green credentials via data. If you don’t know where you are today it’s hard to know where you want to get to, and how you will do it.

Importantly, bear in mind that sustainability is not just for those with the biggest budgets, nor is it just a consideration at the start of a new lease. Start small, and identify with your landlord some of the easier and more basic steps to improve sustainability, such as upgrading lighting systems. When planning for new spaces, consider sustainable fitouts that use environmentally friendly materials and energy-efficient systems. This not only reduces the environmental impact but also can lead to long-term operational cost savings. For leases over five years, it's typical to consider mid-term fitout upgrades or refreshes. These upgrades should also follow sustainable practices, ensuring that any new materials or systems are eco-friendly and that the process minimises waste. Finally, when it comes to the end of a lease, sustainable demolition and make-good practices are crucial. This involves carefully deconstructing the space to salvage and recycle materials, reducing the amount of waste sent to landfill. By planning for sustainability at every stage of the fitout lifecycle, from initial design to end-of-lease make good, businesses can significantly reduce their environmental footprint.

Given that half of respondents in the (Y)OUR SPACE see the key benefit of occupying buildings with sustainability accreditations as improving “attractiveness to clients/customers”, sustainable fit-outs and green leases can do more than improve your building's sustainability credentials.
For more tailored advice on achieving your sustainability goals in your next lease, lease renewal or office space, reach out to our team at Knight Frank.

To read Knight Frank’s (Y)our Space report, click here: ANZ (Y)OUR SPACE - download the report