Green leases for hotels

What is a “Green Lease”?

There maybe misconceptions as to what a “Green Lease” entails. There is no legal requirement to make leases green. Through the EU Energy Performance of Buildings Directive now we have DECs (Display Energy Certificates) and EPCs (Energy Performance Certificates), but arguably these rating systems go nowhere near as far towards establishing a sustainability framework as the Australian Building Greenhouse Rules.

Absent changes in valuation methods to attribute a value to greenness, the primary drivers for “Green Leases” are factors such as: corporate social responsibility, any possible premium consequential upon having lower energy costs; and “fool proofing”, in other words anticipating now what may be the requirements of future green legislation.

Practitioners have not completely re-written the form of lease agreements to produce a new form of lease which can be championed as being green. Those lease agreements that can claim to be green, are derived from the conventional standard mould but, additionally, will contain special green provisions. Such provisions (often in a separate schedule) may in reality take up no more than a page or two of a lease agreement which in total runs to fifty or so pages. A number of the larger UK institutions - well-publicised examples include Hermes and Hammerson - are now including such special arrangements in their lease agreements. The precise drafting for these provisions will differ as between landlords.

The contents of a green lease

Typically, there will be an aspirational statement of intent in which the landlord and tenant seek to improve energy efficiency and environmental sustainability. This may not be a binding commitment but, such a statement of intent is not without its uses as it could be used to interpret other areas of the lease agreement such as the provisions relating to alterations, replacement of M&E and the service charge arrangements.

There may, additionally, be specific commitments from the landlord and the tenant to co operate to achieve these stated objectives. Perhaps, the landlord may agree, to procure that his building is managed and services provided in an energy efficient and sustainable manner. The tenant may: be prevented from undertaking alterations which adversely affect the environmental performance of the building; be required to ensure alterations that are undertaken use sustainable materials; and be required to conserve energy (for example by imposing restrictions on the use of air-conditioning).

Why have green provisions?

The goal behind these provisions is to reduce the carbon footprint of the building by influencing the behaviour of both owner and occupier alike: owner in terms of the constitution replacement and maintenance of his “bricks and mortar”; occupier in terms of the way space is used and the way its business is conducted. I consider such arrangements to be of greater meaning in multi tenanted buildings such as shopping centres.

Relevance to hotel leases

There are, I think, a number of reasons why, perhaps, “Green Lease” provisions are less suited to a lease agreements for hotels:

• The landlord is likely to have limited involvement in the management of the hotel. The hotel is likely to be a standalone asset (rather than forming part a larger asset – compare the example of a shopping centre). So, there is less scope for mutual co-operation on sustainability related issues.
• The tenant/operator will already deal with most (if not all) of these issues through its own brand standards. The tenant/operator may consider a covenant in its lease agreement to maintain brand standards should suffice. Indeed, from the tenant/operator’s perspective it may prefer to do so because “Green Lease” provisions could mean different things to different landlords. The tenant/operator would want to avoid the situation where what his landlord expects to be done to meet his landlord’s criteria for sustainability is inconsistent with brand standards: that potentially could have an adverse affect on the brand.
• There may be less incentive for the landlord to have a “Green Lease” because to the outside world there is limited connection between the owner of a leased hotel and the asset itself. My apologies if I seem cynical in my suggesting that an owner’s motivation is promotion of its own corporate image, but pioneering one’s own corporate social responsibility is now enshrined in statute (section 172 Companies Act 2006). We acted for Accor last year on the sale and leaseback of a portfolio of hotels to Land Securities. In the public eye, I suspect, notwithstanding that sale, those hotels are still Accor Hotels.

Hotel leases are different from the standard institutional lease. A well-drafted hotel lease agreement should contain specific provisions that cover replacement/renewal of FF&E and (on longer cycles) CapEx programmes. These provisions usually would be referenced to the appropriate hotel and/or brand standards. Although not specifically green provisions these arrangements do provide a framework for implementing green objectives.

However, for a leased hotel, there are synergies between the landlord’s and tenant’s interests on the issue of sustainability which could be incorporated into a “Green Lease” such as:

• setting (and then co-operating to seek to maintain) energy, water and waste reduction targets;
• information sharing relating to energy usage;
• “pre-wiring” landlord’s approvals for renewals and replacements that conform to agreed sustainability criteria;
• minimising or reducing environmental impact;
• at the development phase (initially or for extensions) implementing green objectives (presumably subject to brand standards).

Comparison with management agreements

As I have pointed out above, one of the reasons why a landlord may feel no need to have a “Green Lease” is because a landlord/owner does not benefit from the cost-savings to be achieved from energy efficiency and other green operating practices that the tenant/operator implements.

However, under a management agreement, where the cost risk is almost entirely with the owner, rather than the operator, it is in the owner's interest to achieve maximum energy efficiency with minimum waste to reduce operating costs and increase profit. The owner may also benefit from increased revenues due to customer preference for a hotel with well-publicised green operating practices. The owner therefore has greater green incentives than a landlord.

In relation to both leases and management agreements, the interests of the landlord, tenant, owner and operator are all different. The challenge for anyone negotiating a lease or management agreement is to try and align those interests as much as possible to avoid tensions throughout the long life of these agreements.