The energy transition and the concept of sustainability have come to the real estate sector. Not only do project developers and real estate owners have to meet stricter requirements for improving the ecological balance during construction, building management is now also in the focus of legislation and European regulations. While striving to increase the energy efficiency of buildings, the real estate industry is also concentrating on the expansion of green energy generation (photovoltaic systems, heat pumps) and e-mobility. A new push in this area is expected from the upcoming EU legislative act to tighten the Energy Performance of Buildings Directive 2010/31/EU[1] (last amended by Directive 2018/844/EU).[2]
One instrument to ensure the sustainable management and use of buildings and properties is the conclusion of green leases. They enable the contracting parties to fulfil their sustainability goals, which they mostly set themselves.
What is a green lease?
In principle, there is no definition of a "green lease", nor is it currently possible to obtain certification for leases as "green leases". Recommendations for the wording of green leases were drawn up by the German Property Federation (also known by its German acronym ZIA), these are also used by the Austrian real estate sector for the purpose of orientation.
In practice, green leases are mainly standard tenancy agreements supplemented by so-called sustainability clauses. Such contractual clauses are mainly found in rental agreements for commercially used properties.
Green leases are characterised by the fact that the contracting parties align the ongoing operation and management of the building and the property along the lines of sustainability criteria. As a rule, specific goals are set in the contract, for example, the parties agree to increase the building's energy efficiency through defined renovation and modernisation measures, to give priority to renewable energy, to reduce waste as well as energy and water consumption, to use environmentally friendly materials or cleaning processes and to reduce emissions.
The wording of such contractual clauses may be related to building certifications. For example, the contractual clauses are intended to enable compliance with certain sustainability criteria in order to obtain certification of the building as a “green building”.
The binding nature of these contractual provisions can range from a mere recommendation or a promise to make an effort to an obligation of the parties which can be sanctioned in the event of breaches. Due to the many options, it is advisable to be cautious in one’s market appearance so as not to make any unclear statements or assurances.
How can a tenancy agreement be “green”?
Green leases may be structured in different ways, depending on the type and intended use of the building and the property. The tenancy agreement must be tailored to the respective individual interests of the parties.
a) Declaration of intent on sustainability
In green leases, the contracting parties usually draw up a declaration of intent about the sustainable operation of the property and building in the tenancy agreement. Such declarations of intent can set out a common understanding between the parties as to how they generally define the sustainable use of the property. This can be useful to support the interpretation of the individual contractual provisions and can also provide assistance in closing gaps in the contractual provisions, which may also exist from an ecological point of view. The definition is not limited to energy efficiency and the reduction of the CO2 balance alone. The parties may in principle determine that, apart from ecological and economic sustainability, social sustainability (healthy living, pleasant indoor climate, high sound insulation, etc.) is also aimed for.
b) Energy monitoring and energy audits
In order to optimise operating costs, the parties can agree on mutual information and disclosure obligations or define energy monitoring measures. This serves to collect, disclose and exchange energy data and forms the basis for cost savings. It is also conceivable that tenants give their consent to energy audits. This allows landlords to determine where improvements are still necessary and how the energy efficiency of the building can be increased.
If a certification of the building managed as a green building is available or sought (e.g. certification according to LEED, ÖGNI/DGNB or BREEAM), data as described above can form the basis for fulfilling the requirements of certification systems. In general, landlords and tenants can use the data obtained for sustainability reporting.
c) Sustainable property management
With regard to property management, the parties can agree that, apart from the criteria of economic efficiency and economy, aspects of ecological sustainability are to be taken into account, too. This enables landlords to commission more ecologically sustainable services, even if these are not the “cheapest” measures. In this respect, the parties may also be held to cleaning which is subject to stricter requirements in terms of water consumption and environmental compatibility (e.g. the use of cleaning agents awarded the “Blue Angel” eco-label, etc.). Criteria for the sustainable use of waste, energy and water can also be specified in the contract (waste avoidance, waste separation, recycling, use of grey water and rainwater, use of timers and motion sensors for lighting, etc.).
d) Modernisation and improvement measures
As regards provisions on the maintenance and alterations of rented properties and the building as a whole, an ecological quality standard for construction measures to be taken may also be agreed. For example, the parties can agree to use ecological building materials or ecologically certified construction materials and they may provide for environmentally friendly construction waste management.
In this context, so-called “yield capex” clauses (also called “split incentive” or “pass-through” clauses, depending on the form) are used for green leases. Landlords finance measures (e.g. the replacement of heating and cooling systems) which lead to savings in operating costs (energy costs) (thus primarily benefitting the tenants) and they have these modernisation measures partly compensated for by higher rental income or retain the savings on operating costs resulting from the energy efficiency improvement in some other way (this corresponds to a “splitting” of the investment costs and savings between the parties).
e) Mobility
For larger commercial properties, the issue of mobility can also be addressed. Apart from options for expanding the infrastructure for e-mobility, such as upgrading car parking spaces with charging stations, measures can also be taken to improve the infrastructural integration of the rental property (e.g. promotion of car sharing and other CO2 -neutral means of transport for employees, incentives for bicycle use, etc.).
f) Sustainability Manual & Green House Rules
The contracting parties can provide for a sustainability manual (instructions on how to use the rented property in an energy- and resource-saving way) as a schedule to the tenancy agreement and they can also draw up “green” house rules.
What should generally be taken into account when setting up the contract?
When setting up green leases, a fundamental distinction must also be drawn, depending on whether the tenancy is exempt from the Landlord and Tenant Act (MRG), or subject to the partial scope of application, or subject to the full scope of application of the MRG. Especially in the case of tenancy agreements which fall under the full scope of application, there are narrow legal limits to the private autonomy of shaping the contractual relations.
If the MRG is fully applicable, one must take into account that the operating cost items that landlords can invoice are exhaustively provided for in the MRG (Sec. 21 et seq. MRG). If landlords want to invoice their tenants for additional costs arising for the sustainable management of the building, this will not be possible in case of full application of the MRG. The maintenance obligations of landlords are also governed by mandatory provisions of the Landlord and Tenant Act (Sec. 3 MRG) and may not be restricted by sustainability clauses.
Furthermore, landlords (and property managers) normally use contract templates. If the sustainability clauses are not negotiated in detail, it must be remembered that (even if the full scope of the MRG is not applied) the contractual provisions are in principle subject to the statutory monitoring of terms like general terms and conditions (GTC). In particular, the contractual clauses may not be grossly disadvantageous according to Sec. 879 par. 3 of the Austrian Civil Code (ABGB). If one wants to invoice tenants for certain costs arising from sustainability measures in the building, such passing on of costs will have to be objectively justified.
Tenancy agreements may also be consumer transactions (e.g. when apartments are let). In this case, the strict monitoring of terms under consumer protection legislation (Sec. 6 KSchG) will apply likewise. Contractual provisions must be worded in a transparent manner, e.g. according to Sec. 6 par. 3 KSchG. Unclear or incomprehensible clauses will be invalid vis-à-vis consumers.
When formulating sanctions, protection against termination must be taken into account in tenancy agreements which fall within the (partial and full) scope of the MRG. In case of MRG-governed tenancy agreements, there is thus a need for strict review as to whether notice of termination can be given in case of breaches.
Conclusion
More and more property developers and property owners are attaching importance to the sustainable use and management of their rental properties and are using green leases for this purpose. Apart from reducing the environmental impact, the economic advantages are also obvious: Green leases cannot only save costs. Through sustainable building equipment and management, the attractiveness of a building on the real estate market can be increased for potential tenants and investors, who usually have to fulfil ESC criteria themselves within their enterprises.
The narrow legal provisions of the Austrian Landlord and Tenant Act on the one hand and the monitoring of terms under the Civil Code in tenancy agreement templates on the other hand may become stumbling blocks for landlords. It must therefore be ensured that the interests of the parties are protected and that the legal framework is adhered to when drawing up a contract. Our experts at KWR will be happy to assist you in setting up green leases.