Environmental, Social and Governance (‘ESG’) considerations have become a major topic of discussion in developing business strategy across multiple sectors in recent years, and commercial real estate is no exception. In particular, the industry as a whole has long been an area of focus when it comes to sustainability and the need to find environmentally friendly alternatives, largely due to buildings and their associated uses accounting for a significant portion of global carbon emissions. One area of commercial real estate that has been notably impacted is commercial leases, as a consequence of developments across the industry such as reform to Minimum Energy Efficiency Standards and the introduction of green leases.
At the start of 2025, with a labour government committed to the UK’s Net-Zero by 2050 plans, and equipped with ambitious policies to promote sustainable development in their Invest 2035 strategy, it is clear environmental considerations will only continue to influence and structure the real estate sector. In turn, the negotiation and content of commercial leases in the UK will be impacted, as well as relationships between landlords and tenants. However, despite the need and drive for change, there are no easy fixes, and it is clear that challenges will continue to arise in this ever-evolving space.
EPCs: Potential Reforms
The Energy Performance Certificate (the ‘EPC’) is now a key tool for assessing the performance of buildings, a purpose which is widely beyond its original scope. EPC ratings are used as the basis for energy efficiency targets, regulatory requirements and as an eligibility requirement for funding.
In 2023, the Minimum Energy Efficiency Standards (MEES) regulations mandated that commercial properties must have an EPC rating of at least an ‘E’ to be legally let (subject to certain exemptions). This requirement applies to both new tenancies and existing continuing leases, marking a significant shift from previous regulations that only affected new lettings. In 2025, we are aware that further requirements are incoming, with the minimum EPC rating for commercial properties set to be raised to C in 2027 and B in 2030. Each phase of increasing the minimum EPC band will provide a “compliance window” beginning two years before respective year, during which owners must either meet the required rating or demonstrate that they have implemented the highest feasible improvements within cost-effective limits. However, approximately 28% of commercial properties are currently rated ‘D’ or lower, with research showing that around 73% of office spaces in England and Wales fall into this category. At present, it is not clear exactly when the regulations will change, but there has already been an active response; for example, institutional lenders are adopting a more cautious approach to lending on properties with an EPC rating lower than C. It is likely therefore that these upcoming changes present significant challenges for Landlords, who will need to ensure that their buildings are meeting these higher standards, meaning considering the cost of improvements, who will make them, and whether the landlord has sufficient rights of access to carry out the required works.
In response to the reliance on EPCs, amongst other considerations regarding the evolving complexity in buildings and improvements in energy metric technology, it was agreed that there is a pressing need to reform the Energy Performance of Buildings (EPB) regime. The EPB regime was introduced with the goal of improving the energy efficiency of buildings and reducing their impact on climate change.
In December 2024 the Government published a consultation on changes to the energy performance of buildings (EPB) regime in England & Wales, which proposes various reforms including updating EPC metrics (such as moving away from the current system of providing a banded rating, towards using multiple metrics on EPCs to provide a more complete representation of a building’s energy performance), reducing the validity period of EPCs from the current 10-year period to a much shorter period (potentially under 2 years), and requiring a valid EPC throughout the lease term rather than just on a new lease or sale. The consultation closed on 26 February 2025, and it is anticipated that updates to the EPC regime will be introduced in late 2026.
Green Leases
Another impact that environmental considerations has had on the commercial leasing space is on the drafting of leases themselves. Businesses are increasingly striving to be more environmentally friendly, and bind themselves to green policies, to mitigate their environmental impact, improve their appearance and branding, and align themselves with the values of their staff and future employees. One way of doing this is by entering into ‘green leases’.
A green lease is a lease that includes provisions in which the respective responsibilities of landlords and tenants are laid out in order to improve the sustainability and environmental performance of a property. One large business that has chosen to enter into green leases is Marks and Spencer, which has pledged that its strategy will see green clause on issues like waste management and environmental performance written in to leases for seventy stores across the UK. Green lease provisions can be legally binding on the parties to a lease, in which case they are referred to as “dark green” leases, or they can simply express a commitment to sustainability and include “targets” that the parties agree to work towards, but do not necessarily commit themselves to, known as “light green” leases. While there is no requirement in the UK to enter into a green lease, there are pieces of legislation that impose energy efficient requirements, as well as policies such as the MEES regime, referred to above.
As far as challenges to implementing green leases, there are a host of factors to consider, such as costs of improvements, rent and utility prices, service charge recovery (i.e. can improvements to comply with the lease made by the Landlord be recovered via the service charge, as a cost to tenants) and rights of access to let property for the Landlord to make any improvements required. It is certainly not the case that additional environmental clauses can simply be added to an otherwise generic lease, as there can be a wider impact on other lease terms. It is easy to see how navigating additional requirements required for green leases could impact, and challenge, negotiations between landlord and tenant. Conversely, although there is no set form of green lease, common objectives have been seen represented in the drafting, such as an obligation to co-operate with the other party to achieve a common goal, showing how relationships between the parties may not only be challenged in implementing the additional clauses, but potentially made more symbiotic, in certain cases, as a result.
Green lease drafting has continued to develop to reflect broader ESG issues and in January 2024, the Better Buildings Partnership published an updated version of its Green Lease Toolkit; a collection of green lease provisions and guidance aimed at improving the sustainability of commercial buildings. Though the toolkit has no legal or regulatory status, it does provide a framework for incorporating environmental and social issues into the leasing process, and green leasing, encompassing social impact, will remain an evolving area for real estate in 2025.
Conclusion
It is clear that environmental considerations will continue to be a cornerstone of the real estate sector, and more specifically in commercial leasing, in 2025 and beyond. Both Landlords and Tenants will be required to adopt ESG compliant approaches to their properties and leases, staying on top of new laws and regulations in this space. For Landlords specifically, this is also essential to attract high-quality tenants who are increasingly prioritising environmentally friendly criteria, and for Tenants who will need to ensure their leased spaces align with their own corporate ESG goals to maintain their reputation and fulfil regulatory requirements.
This update is for general purpose and guidance only and does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. No part of this update may be used, reproduced, stored or transmitted in any form, or by any means without the prior permission of Brecher LLP.
