Across the property industry, climate and ESG ambitions should no longer be considered as optional. Inefficient, high-carbon buildings are becoming harder to let, insure and finance; there is increasing investor pressure, and organisations are publicly committing to doing better.
Real estate is particularly exposed to the risks of climate change. Leases, funding agreements and construction contracts often run for several years and need to address the impact of climate emissions.
Decisions made at the point of contract – how a building can be altered, who can occupy it, how energy is procured – all carry a carbon footprint.
So-called green leases have sought to address some of these points to include drafting to make premises more environmentally friendly.
However, there is a still a patchwork of drafting to address landlord and tenant obligations in relation to sustainability, from ‘lighter green’ clauses often relying on the collaboration of parties, to ‘dark green’ clauses tackling specific issues in a more measurable way.
Climate risk is business risk
Climate risk is no longer only a talking point. It’s a core business risk that affects value, liquidity and reputation. Flooding, heat stress and storms can easily damage assets and disrupt occupiers.
Changing regulation, lender expectations and market practice can create legal and financial liabilities. Lenders and investors are under increasing pressure to demonstrate how property portfolios align with climate goals, and insurers are re-pricing risk in light of more frequent and severe weather events.
The financial sector is moving with clauses emerging that link finance costs to climate performance – such as interest “ratchets” for verified emissions reductions or minimum recycled content requirements in projects.
Contracts as a delivery tool for climate
Over recent years, practical climate clauses have been developed for real-world contracts. In property, we’re seeing growing interest in:
- Clauses that raise awareness of buyers and tenants of climate-related risks over a building’s life.
- Lease provisions that support climate-aligned alterations and encourage circular economy approaches to repairs and fit-out.
- Service charge structures and data-sharing mechanisms that enable better environmental performance across multi-let buildings.
The detail will always depend on the asset and the parties involved, but the common thread is clear: contracts need to be a practical tool for delivering climate strategy, not just a footnote in policy documents.
It’s important to stress that these are not “one size fits all” solutions, and the right approach will depend on the type of asset, the parties’ respective bargaining positions and their broader climate strategies. However, climate considerations are starting to appear in core documents that govern how buildings are owned, occupied and operated, not just in policy statements and sustainability reports.
What this means for landlords and tenants
For landlords, climate clauses are increasingly part of mainstream risk management. They help protect asset value, support financing and meet the expectations of climate-conscious occupiers. They also provide a framework for collaboration on improvements and data-sharing.
For tenants, particularly those with net zero or ESG commitments, climate clauses ensure the buildings they occupy don’t undermine their organisation’s goals, and give them the flexibility and data they need for reporting.
Because of expected changes to EPC requirements and a shifting regulatory environment, it is important landlord and tenant expectations and obligations are regularly reviewed and communicated.
Many organisations recognise the issue, but standard documents and deal processes haven’t caught up. That’s where targeted, proportionate use of climate clauses can make the biggest impact.
How we can help
We are advising both landlords and tenants on how to start integrating climate considerations into their real estate contracts in a way that is commercially realistic and aligned with their wider strategy. This can range from a light-touch review of heads of terms or standard leases, through a more structured look at how climate clauses might work across a portfolio. We regularly review suites of documents to advise on a consistent approach across a portfolio.
If you would be interested in a conversation around how you can do the same, get in touch.