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18 March 2024 | Comment | Article by Peter Hurn

Net zero in the built environment: leasing and development considerations

Net zero, the state where greenhouse gas (GHG) emissions are balanced by GHG removal, ensuring an overall net zero emission, is legally mandated in the UK by the Climate Change Act 2008. The UK is committed to achieving net zero by 2050; however, many companies are setting goals to de-carbonise their organisations sooner to receive the benefits of net zero more quickly and do their part in reducing global emissions.

The built environment is one of the largest sources of climate emissions. According to the UK Green Buildings Council (UKGBC), 19% of our carbon emissions are from energy used to heat, cool and power our buildings, and 25% of UK emissions are directly attributable to the built environment. Our buildings, towns, cities, and infrastructure therefore have a clear role to play in enabling the UK to achieve its climate commitments to reduce GHG emissions. Creating a built environment that meets net zero objectives, whilst delivering green growth and value creation represents both a major challenge and opportunity to industry and policy makers alike. So, how is this being achieved in practice?

The rise of the green lease

A key issue in achieving net zero in the built environment will be allocating responsibility for who does what and who pays. Most commercial property in the UK is leased so the landlord and tenant relationship is crucial in specifying such responsibilities and liabilities and the rise of the green lease is one effective tool in achieving this. Green leases encourage landlords and tenants to comply with recommended practices and standards for energy saving and environmental protection. They can also make sound commercial sense for landlords as greener buildings may command a ‘green premium’.

It is important to be aware that green leases can be for used for existing buildings as well as for new buildings. It may be more practical for the parties to enter into a green ‘memorandum of understanding’, a non-binding written statement setting out the parties’ intentions as to how the building’s environmental performance will be managed and improved. It does not need to be in place for the full lease term and could be amended from time to time. Major retrofitting could then occur once the whole building becomes vacant. According to UKGBC, 80% of buildings which will be occupied in 2050 already exist, meaning decarbonising existing stock is a major priority.

Commitments within a green lease can range from soft to harder, often referred to as light green and dark green clauses. A light green clause may not be legally binding or limited in scope whereas a dark green clause is usually legally binding, substantial in its level of commitment and broader in terms of issues covered. Light green clauses can be found in the Model Commercial Lease (MCL) and in the Better Buildings Partnership Green Lease Toolkit (BBP Toolkit) and may comprise obligations such as an agreement to co-operate to identify appropriate strategies for the improvement of the environmental performance of the premises and building, provisions requiring the landlord to establish a landlord and tenant forum or a building management group and provisions regarding data sharing (the latter point is important as it will provide useful information that can be applied practically to improve the operation of the building).

Light-to mid-green clauses might include an obligation on the landlord and tenant to ‘take into consideration’ any impact on environmental performance of works to the building (found in the MCL). The BBP Toolkit gives various options, including a landlord’s right to carry out works to the tenant’s premises to improve the environmental performance of the building and a right to carry out such works to the common parts (provided that the landlord uses reasonable endeavours to minimise disruption).

Mid green clauses may cover areas such as metering to measure the supply of utilities to the premises (the landlord could have a right to install equipment and lease could also grant the tenant a right to request the installation of meters either by itself or, at the tenant’s cost, by the landlord) and changes to the tenant’s alterations covenant.

Dark green clauses could include an obligation on the tenant to use only sustainable materials when completing tenant works, or an obligation on the landlord to offer a rent reduction should the tenant meet its energy efficiency targets. The Chancery Lane Project (CLP) offers a range of darker green provisions. For example, Lotta’s clause stipulates that electricity supplied to a leasehold property is from 100% renewable sources. Darker green clauses may consider wider ESG obligations beyond energy-efficiency and environmental sustainability, for example, a lease might also oblige the landlord to consider the social impact of its operation and ownership of the building by paying the National Living Wage to those who provide any services to the building.

Net zero and development

Net-zero compliance is likely to become one of the most significant drivers of change within the construction industry over the next 30 years. However, there is currently no legal requirement for UK developers to switch to low-carbon materials or methods of construction. Major developers have set their own net zero targets which will include emissions from the embodied carbon in their developments.

The Government’s Heat and Buildings Strategy published in 2021 is a key development in the decarbonisation of the built environment and an indicator of official policy’s future direction of travel. Announcements included ensuring all new buildings in England are ready for net zero from 2025, the phasing out of the installation of new natural gas boilers from 2035, £3.9 billion of funding for decarbonising heat and buildings and a deferral of the decision on the role of hydrogen for heat until 2026.

Furthermore, compliance with the Government’s Future Homes Standard (FHS) will be mandatory by 2025. The FHS focuses on improving heating, hot water systems, and reducing heat waste, achieved by replacing current technologies with low carbon alternatives. Certain aspects of the Building Regulations have already been updated (concerning ventilation and conservation of fuel and power) to meet the specifications set out in the FHS.

How can developers transition to sustainable objectives?

The Net Zero landscape is continually evolving, and future, more stringent targets and compliance is likely, whether through legislation, official guidance, and market practice. The lack of Government mandated policy concerning decarbonisation in the building sector has led to the development of the UK’s first cross-industry Net Zero Carbon Buildings Standard that brings together Net-Zero Carbon requirements for all major building types. Leading organisations including Building Better Partnerships, BRE, the Carbon Trust, RIBA, RICS, and UKGBC have joined forces to champion this initiative.

The Standard will be ‘science-based, aligned with delivering a Net Zero Carbon UK by 2050 and a 78% reduction by 2035 in the UK in order to limit global warming to 1.5°C’. It will be  appropriate for ‘developers, contractors, asset owners and managers, occupiers, investors, financiers and funders, consultants, building industry professionals, building managers and product/material manufacturers, suppliers, and distributors’. The Standard is currently in its test phase with industry responses being collated and assessed with an expected test Standard being launched early in 2024.

The Building Research Establishment’s Environmental Assessment Methodology (BREEAM) is another voluntary method for evaluating and certifying the environmental performance of a building’s design, construction, and operation. Achieving a BREEAM rating is a prerequisite to securing public development funding and many local development frameworks specify BREEAM ratings to be achieved to demonstrate the sustainability of developments. BREEAM certification can be used by developers to evidence sustainability credentials when reporting on their corporate social responsibility.

And most recently, the UKGBC has issued new guidance on Scope 3 embodied carbon measurement and reporting. ‘Embodied carbon’ is typically associated with any processes, materials or products used to construct, maintain, repair, refurbish and demolish a building. Scope 3 emissions, in the context of the built environment, can be categorised as those that originate from early in the value chain (e.g. extraction and production of raw materials) and emissions from later in the value chain (e.g. sale, transportation and waste disposal of an end product). The Guidance covers how developers, owners, contractors, investors, lenders, and facilities managers can use embodied carbon assessments to report Scope 3 emissions across an asset’s lifetime and how architects, engineers and other professional services should adopt a project-based emissions disclosure for embodied carbon.

Practical, achievable steps developers can take now to lower their carbon footprint include using sustainable, greener materials where possible, verifying that suppliers have sourced construction materials ethically and themselves have sustainable policies, ensuring the site is run in such a way as to minimise dust, uses energy efficient equipment, and has a waste management policy, using sustainable methods of construction if possible and recycling excess inventory.

Developers may also wish to consider contractual provisions to aid their drive towards net zero development. For example, The Chancery Lane project discussed above has drafted a range of contractual clauses aimed to mitigate climate risks in the development context. Willow’s Clause, for example, sets a carbon budget for construction projects, along with the financial budget, to reduce greenhouse gas emissions. Daniel’s Clause identifies six key performance indicators (KPIs) for contractor performance against the employer’s environmental and sustainability targets. The use of pre-construction service agreements give developers the opportunity to clarify the services the contractor is to perform and can be used to set carbon emissions targets. Framework agreements are another way forwards for developers to devise net zero strategies by establishing key deliverables upfront.

The task of achieving net zero in the built environment is complex and will take time. In the longer term, the industry will have to innovate and make major investments in technologies that do not, at present, exist. Demand for buildings that fulfil an ambitious environmental brief will only increase, as companies respond to the desire of end users to work and live in energy-efficient environments. Developers who take steps to review their carbon footprint and who incentivise behaviours aimed at reducing emissions now will be better prepared to meet the challenges of inevitable further regulation whilst contributing to the reduction of global climate change.

Author bio

Peter Hurn


Peter heads up the fastest expanding real estate team in Wales. He was responsible for negotiating the lease for one of the biggest pre-let office deals in Wales, the firm’s new landmark headquarters at Two Central Square.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.


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