Article 06: The Split-Incentive Problem: How Landlord-Tenant Relationships Shape Office Energy Use

A series mining the PhD thesis "London and UK Office Buildings: Investigating Energy Use and Landlord-Tenant Influences" (Azhari, 2025).

Key takeaway. In a multi-let office, the organisation that pays for the boiler is rarely the one that benefits from replacing it. The split incentive shapes energy outcomes more deeply than any building characteristic, and recognising it is the precondition for almost every retrofit conversation in commercial real estate.

Figure

Landlord and tenant objectives diverge in three places

Cost horizon, capex authority and lease length pull the two parties apart. The split incentive lives in the gap between them.

Landlord

Owns the asset across lease cycles

• – Long-term asset value
• – Multi-decade horizon
• – Bears retrofit capex
• – Constrained by RICS service-charge code
• – Reputation, GRESB, investor pressure
• – Net zero commitments to 2030/2050

Tenant

Optimises within a fixed-term lease

• – Business operations
• – Lease-term horizon (often under 10 years)
• – Pays energy bills, not capex
• – Energy is 1-2% of cost base
• – Wants flexibility, fit-out control
• – Net zero commitments increasing

The split incentive lives between the two boxes

A holiday versus a heat pump

In one of the interviews behind this thesis, a sustainability lead at a major UK landlord described an argument they had recently had with a facility manager. The landlord wanted the FM to recommend installing an air source heat pump in a multi-let office. The carbon savings over the remaining lease term were significant. The capital cost would come out of the service-charge sinking fund and the operational savings would accrue mostly to tenants. The FM, on a bonus tied to in-year service-charge management, would see his variable pay clipped if the spend went ahead. As the interviewee put it:

"We ask facility managers to invest in an air source heat pump to deliver huge carbon savings over the next ten years of their lease. That means their bonus is affected, and they take their family on a different kind of holiday. That is sometimes a difficult one to get over the line."

The anecdote is small. The structure behind it is not. The split-incentive problem is the polite name for what happens when the person who pays for an energy improvement and the person who benefits from it are not the same. In multi-let commercial offices it appears at every level: between landlord and tenant, between asset manager and facility manager, between fund and operating company, between this year budget and next decade lease. The structural problem is not new. The empirical evidence in this thesis is what is new, because seven of the largest UK property organisations explained, in their own words, how they live with it.

Where the divergence comes from

The classical model in commercial property has the landlord provide a building and a service, and the tenant rent the building and pay for the service. The tenant runs the business. The landlord runs the asset. In principle, both parties want the building to operate efficiently. In practice their objectives diverge in three places.

The first is cost horizon. The landlord owns the asset across multiple lease cycles and cares about its long-term value. The tenant signs a fixed-term lease and optimises within it. As one landlord interviewee put it:

"Occupants often have very different objectives to us regarding what success for them as a business looks like. Quite often the energy side of their business is a very low proportion of the expenditure they incur in running their business."

When energy is one or two per cent of a tenant cost base, even substantial percentage savings are not enough to swing the lease negotiation in favour of capital-intensive efficiency. The tenant has neither the appetite nor the incentive to fund building-level improvements they cannot capture for themselves.

The second is the service-charge mechanism. The RICS 2018 Service Charges in Commercial Property professional statement governs how landlords pass certain costs through to tenants. Improvements that go beyond like-for-like maintenance generally require explicit occupier consent. A boiler replaced with the same kind of boiler can go through the service charge. A boiler replaced with an air source heat pump that delivers different carbon, cost and operational characteristics arguably cannot, at least not without consent. The result is that some of the most consequential decarbonisation moves are precisely the ones the service charge cannot quietly pay for.

The third is asset uncertainty. Buildings get sold. Plans change. One interviewee captured the chilling effect on retrofit planning:

"There is an expectation that a specific building will be sold. So it would not make sense for us to spend money or invest in these projects, and therefore we are sort of being paralysed."

If a fund is looking at a five-year hold but the energy retrofit pays back over twelve, the rational answer is to do nothing and let the next owner deal with it. That is not malice. It is the way the financial logic of investment property bends back on itself.

Why physical characteristics cannot save you

A reader of the first half of this series might object that physical retrofit can deliver real savings regardless of who pays. That is true but partial. The fabric measures that reduce heat loss tend to lower gas demand. Article 5 showed that gas EUI varies very little across the Greater London office stock and that age and physical characteristics explain almost none of its variation. The big retrofit prize is on the electricity side: controls, lighting, plug-load management, HVAC optimisation, sub-metering, BMS analytics and the operational stewardship of running the building well. Almost all of those interventions depend on the landlord-tenant relationship rather than the building envelope. Some require tenant cooperation (sub-metering inside the demise). Some require capital that does not naturally fit in the service charge. All require alignment of objectives between two organisations that are not legally one.

Article 3 captured this statistically: 33 building characteristics together explain only 18 per cent of electricity EUI variation. The empirical evidence here is the qualitative complement. The 82 per cent that the static model cannot see is mostly organisational.

The patterns that make a difference

Where the seven interviewed organisations have managed to overcome the split incentive, they have done so via a small set of repeatable relational moves. Stakeholder engagement (continuous communication with tenants on energy, carbon and sustainability) is covered in detail in Article 8 as the fourth operational lever. Three further relational moves are summarised here.

First, in-house management. Several interviewed landlords have moved from external managing agents to in-house teams whose KPIs include energy and carbon performance. Removing the layer of misaligned incentives between a fund and its outsourced FM reduces friction on decisions like the heat pump anecdote above.

Second, lease drafting. Article 7 treats green leasing in its own right. The headline is that lease language can shift the cost recovery, data-sharing and consent rules in ways that materially change which retrofits are feasible.

Third, internal carbon pricing. Some of the interviewed REITs apply an internal carbon price that pushes business cases for retrofit over the line, even when payback periods exceed lease durations. Smaller landlords without comparable balance-sheet support find this harder. The implication for policy is that voluntary measures alone are unlikely to bring the SME landlord stock with them.

When the regulator should and should not step in

Some of the friction this article describes can be reduced by leaders inside the industry. Some can be reduced by lease standardisation. Some can only be reduced by regulation, and the choice of regulatory frame matters.

Minimum Energy Efficiency Standards (MEES) regulations tie market access to EPC band. Article 2 argued that EPCs are weakly correlated with operational energy use. Tightening MEES alone will not address the split-incentive problem; it can even worsen it, by forcing landlords to fund EPC-driven works that do not actually reduce bills. Operational rating schemes such as NABERS-UK (Article 9) target a different lever. By making real energy use visible at the building level, they shift the conversation from compliance to performance.

The thesis suggests, in line with Mallaburn and colleagues (2021) on the Australian experience, that regulation needs to combine three elements to bite on the split incentive. Mandatory disclosure of operational ratings above a defined size threshold. A minimum performance bar tied to operational rather than asset rating. And an enforcement architecture that addresses the larger landlords and asset owners, where the ownership concentration documented in Article 1 amplifies the lever.

Limitations

Interview sample is small (seven major UK property organisations) and skewed to large landlords. SMEs, secondary stock and regional landlords are not represented. Almost all interviewees were on the landlord side; the tenant voice is captured indirectly and should be treated with that asymmetry in mind. Interviews were conducted in the 2021 lockdown, which probably amplified certain themes (occupancy, ventilation) and muted others (commuting, growth). The findings pre-date the 2022 energy price shock, which has since changed the economics of many interventions. Qualitative findings cannot be generalised statistically; they identify mechanisms and explanations, not population-level effect sizes.

References

• Azhari, R. (2025) London and UK Office Buildings Investigating energy use and landlord/tenant influences. Doctoral thesis (Ph.D), UCL (University College London). URL: https://discovery.ucl.ac.uk/id/eprint/10204821/
• Haugen, T. B. (2008). Facilities management theory and the client-supplier model.
• Collins, D., Junghans, A., and Haugen, T. (2018). Green leasing in theory and practice.
• Royal Institution of Chartered Surveyors (2018). Service charges in commercial property: professional statement. Available at: https://www.rics.org/profession-standards/rics-standards-and-guidance/sector-standards/real-estate-standards/service-charges-in-commercial-property
• Better Buildings Partnership (2023). BBP Climate Commitment. Available at: https://www.betterbuildingspartnership.co.uk/member-climate-change-commitment
• Lucon, O., and colleagues (2014). Buildings. In: Climate Change 2014: Mitigation. IPCC AR5 WGIII. Available at: https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter9.pdf
• Allcott, H., and Greenstone, M. (2012). Is there an energy efficiency gap? Journal of Economic Perspectives, 26(1), 3-28. Available at: https://doi.org/10.1257/jep.26.1.3
• Mallaburn, P., Azhari, R., Fawcett, T., and Topouzi, M. (2021). Australian non-domestic buildings policy as an international exemplar. Buildings and Cities, 2(1), 318-335. Available at: https://doi.org/10.5334/bc.114

Read next

• Article 7: Green Leases, Service Charges and the Legal Plumbing of Office Sustainability.
• Article 8: From 38 to 73 Per Cent Energy Savings.

About this series

This article is part of a fifteen-piece series adapting the 2025 PhD thesis "London and UK Office Buildings: Investigating Energy Use and Landlord-Tenant Influences" (Azhari, 2025) for a mixed academic and industry readership. The empirical findings draw on the 3DStock model of 6,038 office Self-Contained Units in Greater London with metered energy data for 2017, supplied by BEIS under a data-sharing agreement, alongside the Better Buildings Partnership Real Estate Environmental Benchmark. The qualitative findings draw on semi-structured interviews with seven major UK property organisations, conducted during the 2021 lockdown. Interviewees and their organisations are anonymised by role and organisation type. Please cite the original thesis for academic use.

Author. Rayan Azhari completed his PhD at the UCL Bartlett School of Environment, Energy and Resources in 2025, supervised by Paul Ruyssevelt and Kathryn Janda. The research was supported by the EPSRC Centre for Doctoral Training in Energy Demand (LoLo) and UK Research and Innovation through the Centre for Research into Energy Demand Solutions.

Other articles in the series. Article 1 The 30/85/89 Problem; Article 2 Why EPCs Do Not Tell You How Much Energy a Building Uses; Article 3 Eighteen Per Cent; Article 4 Mapping the Stock; Article 5 Height, Age and the Fuel Question; Article 6 The Split-Incentive Problem; Article 7 Green Leases and Service Charges; Article 8 From 38 to 73 Per Cent Energy Savings; Article 9 NABERS for Britain; Article 10 Time to Retire ECG-19; Article 11 Can London Speak for England and Wales; Article 12 The Hybrid-Work Footprint; Article 13 Why I Used Linear Regression Over Random Forest; Article 14 Vertical Postcodes; Article 15 What Is a Building?