Sustainability first: Is there a new rulebook for lease negotiations?

Sustainability has unquestionably risen in the occupier's agenda, and for most occupiers, it has become a threshold issue: a building must be able to support a business's sustainability targets and reporting obligations, or it becomes difficult to justify regardless of the commercial deal on offer.

For many organisations, office space is now a lever for achieving corporate Sustainability targets, reducing emissions, and meeting increasingly demanding disclosure requirements. As a result, sustainability performance is moving to the front end of leasing strategy, not as a “nice-to-have”, but as a risk and compliance issue that can materially affect an occupier’s ability to report, operate and defend their sustainability claims.

The rise of a ‘sustainability-first’ negotiation approach

A “sustainability-first” approach does not mean sustainability matters more than the cost. It means that, when an occupier is considering a building that doesn’t yet meet their sustainability requirements, the negotiation should start with the question that matters most to the business: can this building meet our sustainability targets and reporting requirements over the term of the lease, and what if not, is there a clear roadmap to get there?

Too often, tenants default to the traditional measure of negotiation success: reducing dollars. But in a reporting-heavy ESG environment, the more strategic question is: can occupiers afford to treat sustainability as a secondary issue once the commercial deal is done?

The sequence matters because sustainability outcomes often require capital works, infrastructure upgrades, and long-term planning, elements that are far harder to secure after terms are agreed. When occupiers are reviewing options in the market, relative to sustainability they are addressing two key elements; the design and construction of the asset, and then how will it perform operationally during the lease period. In practice, the most effective path is:

1.     Agree on the “product” first (what is the landlord committing to deliver),

2.     Agree on how this commitment shall be maintained during the life of the lease (including reporting obligations),

3.     Agree on the penalties that apply if the ‘product’ doesn’t meet what was promised, and what the remedies are, and only then

4.     Negotiate the commercial outcome with full clarity on what is being leased.

Why occupiers can’t take a ‘one size fits all’ approach

Global and regional markets are moving at different speeds, with different regulations and different levels of landlord readiness. This ultimately means corporate occupiers cannot always apply a single standardised approach across their corporate real estate portfolio.

In the (Y)our Space survey findings, occupiers named integrating ESG at a portfolio level as their biggest challenge, and the tension is clear: it’s difficult to drive consistency when building owners and markets are working to different timelines, targets, and utilise different rating tools.

That makes agility critical. But when it comes to lease negotiations, agility does not mean lowering standards, it means being explicit about the sustainability outcomes required and structuring the negotiation accordingly.

From ambition to accountability

This shift is not only occupier-led. Investor expectations are also raising the bar. Knight Frank’s ESG Property Investor Survey shows that 92% of Australian investors’ strategies are now driven by internal net zero goals, while 67% actively prioritise green building certifications in acquisitions.

Transparency is also critical. With growing ESG reporting obligations, businesses require access to reliable, auditable data to support disclosures across Scope 1, 2 and increasingly Scope 3 emissions. This is driving demand for buildings that can not only perform efficiently but provide consistent and verifiable reporting over time.

This convergence matters. When both investor and occupier agendas are moving in the same direction, sustainability performance becomes tied to leasing risk, capital planning and long-term value, not just brand positioning.

This is why “ambition” is no longer enough. Increasingly, occupiers are requiring sustainability commitments to be formalised within lease documentation, turning sustainability from aspiration into contractual accountability through defined targets, reporting requirements, maintenance standards and consequences for non-compliance.

For occupiers, the now heavily regulated reporting requirement within which we operate has meant the commercial question has becomes sharper: if building performance isn’t measured and verified, it becomes a commercial risk that is no longer acceptable.

What does accountability look like

Occupiers have long been looking for the golden bullet to hold landlords accountable to operational performance, and where sustainability reporting is concerned, it has rarely been found. NABERS ratings, as they stand today, are plagued with the ‘occupancy issue’ where building vacancy, whilst irrelevant to the sitting tenant, negatively impacts the NABERS rating a building can achieve.

Astrid Beemster, Partner at Norton Rose Fulbright in Sydney, regularly advises on leasing transactions and shares her challenges in contractually agreeing on sustainability provisions in the lease. “In my experience, if an occupier wishes to hold a landlord legally accountable for achieving operational performance obligations and sustainability reporting, then this should be considered and agreed up front during heads of agreement stage and the parties need to clearly articulate the specific standard,” Beemster states.

“That said, the obligation will often be framed as a ‘reasonable endeavours’ obligation, and on the basis that non-compliance by the landlord has limited consequences (e.g. by excluding more onerous remedies such as rental abatement or termination rights). We generally see more alignment where the sustainability targets reflect the requirements of the landlord’s investors and financiers, where the specific asset is capable of performance (e.g. institutional grade assets being professionally managed) and the tenant’s requirements are clearly defined. As these trends continue to grow in the commercial real estate market because of tenant, investor and financier requirements, then we would expect to see these concepts to naturally make their way into lease documentation”.

This article is from Knight Frank’s The Tenant View publication. To download the report, click here.