Global climate alignment has been under the microscope in Glasgow and one thing is becoming apparent: the commercial property sector faces change.
The UK government has proposed a trajectory towards net zero for privately rented commercial buildings in England and Wales, requiring them to achieve new standards by 2030. It is a tall order, and estimates suggest it will need an investment of approximately £5bn.
But money alone will not achieve the change the climate emergency demands. The dynamic of landlord-tenant relationships means many of our commercial, retail and office buildings are a long way from net zero compliance. Without a major overhaul of leasing law and practice, the property industry is unlikely to reach the government’s goals.
It is widely acknowledged that the traditional landlord-tenant relationship has a problem with split incentives. The landlord maintains the fabric of a building and its services, and the tenant pays the energy costs. This means the landlord has no incentive to invest in energy efficiency improvements, while the tenant usually has no ability to do so.
However, there is no reason this problem cannot be overcome in a way that benefits both. Energy efficiency improvement works are a win-win: landlords get future-proofed, green assets, while tenants enjoy lower running costs and the reputational advantages of a lower carbon footprint. Changes to lease structures can ensure that the costs are shared as well.
The Investment Property Forum recently produced a paper, ‘Towards Net Zero Leasing’, which looks at exactly this topic. It provides a blueprint to show how landlords and tenants can work together to reduce the carbon impact of their buildings.
It will be disruptive, and it will require investment, but it should not be delayed. The urgency of the problem demands an overhaul of traditional leasing models, and it means landlords and tenants, supported by ambitious policy reform, must become more collaborative.
Chris Brigstocke is a partner at Winckworth Sherwood and was lead author of the Investment Property Forum paper ‘Towards Net Zero Leasing’