Article 07: Green Leases, Service Charges and the Legal Plumbing of Office Sustainability

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

Key takeaway. A commercial lease is an energy policy in disguise. Whether a landlord can refurbish, install sub-meters, recover capex or oblige a tenant to share data is determined by the lease, not by any law of physics.

Figure

Four lease structures, four different energy investment dynamics

UK commercial office leases and what each allows the landlord and tenant to do

Full Repairing & Insuring (FRI)

Tenant pays + benefits

Cleanest incentives. Short horizons limit payback.

Internal repairing & decorating

Landlord base, tenant fit-out

Most common; split-incentive bites hardest here.

Institutional (25-year)

Length supports long payback

Increasingly rare in 2025 office market.

Turnover / hybrid

Shared rent risk

Could share energy upside; machinery rarely included.

Why drafting matters more than retrofitting

Most conversations about commercial real estate decarbonisation start with technology. Heat pumps, controls, sub-meters, refurbishment specifications. They should probably start earlier than that, with the lease. The structure of a commercial tenancy determines whether the landlord has the right to install equipment in the demise, whether the cost can be passed through service charge or sinking fund, whether the tenant must share data and whether the operational savings flow back to the party who paid for the upgrade.

A lease is, in this sense, a piece of energy policy written by lawyers. The clauses that matter for energy are scattered through documents that were drafted for entirely different purposes: rent review, alienation, repair, alterations, service charge, end-of-term reinstatement. The thesis interview chapter shows that the leading UK landlords have learned to navigate this terrain in practice. Many other landlords are still discovering it.

Four lease structures and what they allow

UK commercial offices broadly sit in four lease structures, each with different implications for who can do what.

Full Repairing and Insuring (FRI) leases place the obligation to repair, maintain and insure on the tenant. The landlord essentially hands over the asset. FRI leases are common on single-let assets where the tenant occupies the whole building. They are also the cleanest in incentive terms: the tenant is funding the work and gets the benefit. The challenge is that FRI tenants often have shorter horizons than the equipment they are operating, and an FRI tenant on a five-year lease has little reason to install plant that pays back in ten.

Internal repairing and decorating leases keep the structural and external repair obligation with the landlord while devolving internal maintenance to the tenant. This is the most common pattern in multi-let offices and the one where the split-incentive problem from Article 6 bites hardest. The landlord can refurbish base-building plant but must navigate the service charge to do so.

Institutional leases, the classical 25-year leases of the 1980s and 1990s, are now rare. Their length used to support long-payback retrofit, but their decline has shortened typical commercial horizons. Most new office leases sit closer to ten years with break options at five.

Turnover or hybrid leases tie part of the rent to the tenant revenue. They are common in retail and increasingly seen in office contexts where landlords are sharing risk with tenants. From an energy perspective, they offer a chance to share both costs and savings, but the contractual machinery to do so is rarely included.

The first analytical move when assessing any retrofit programme is to map the portfolio against these structures. The answer to what can we do? depends on which lease applies.

The service-charge code and what it does and does not allow

The Royal Institution of Chartered Surveyors 2018 Service Charges in Commercial Property professional statement is the central reference. It governs what landlords can pass through and how.

The principle, broadly, is that maintenance and repair costs flow through service charge while improvements do not, unless tenants explicitly consent. The classic test case is a boiler replacement. Replacing a gas boiler with another gas boiler of equivalent capacity at end of life is maintenance and can usually go through service charge. Replacing it with an air source heat pump that delivers different operational, carbon and capital characteristics is an improvement and generally cannot, at least not without tenants agreeing to fund it.

This sounds dry. It is the single biggest brake on decarbonisation in multi-let commercial offices. As one landlord interviewee put it:

"Funding the projects to achieve net zero will be a significant challenge. Those major capex interventions cannot be recovered through the service charge, so they have to come from our own pockets."

There are three practical responses, each used by the larger landlords in the thesis sample.

The first is the sinking fund. Sinking funds are part of the service charge that accumulate against future capital works. They sit within the service-charge framework and the same consent rules apply, but their forward-looking nature can accommodate larger capital items. Sinking funds work best when set up early in the lease and topped up annually. They work poorly when called on for unplanned interventions.

The second is landlord-funded capital with service-charge recovery of the operational savings. The landlord pays the up-front cost, the tenant pays the running cost as before, and the operational saving (lower bills) flows to the tenant. This works in carbon terms but not in capital terms. It shifts the cost of decarbonisation onto the landlord balance sheet.

The third is direct negotiation with anchor tenants. In larger multi-let assets, securing buy-in from one or two anchor tenants can change the consent dynamics for the rest. This depends on relationship management and a credible case, and is one of the things the in-house management discussed in Article 6 enables.

What green leases can and cannot enforce

Green leases, also called environmental leases, attach explicit sustainability obligations to the lease itself. The Better Buildings Partnership Green Lease Toolkit, in widespread use since 2014, sets out drafting options that range from light to strong.

At the light end, green clauses oblige both parties to cooperate on energy and carbon. They sound like courtesy. They actually have teeth, because they create a contractual hook for follow-up obligations.

In the middle range, clauses cover data sharing (the tenant must share half-hourly energy data with the landlord), fit-out standards (the tenant must use specified efficient lighting and equipment), reinstatement (the tenant must not reinstate to a lower standard than they took over), and consent for alterations (the landlord may not unreasonably withhold consent for energy-related improvements by the tenant).

At the strong end, clauses cover minimum energy ratings, rent-review penalties for non-cooperation, and explicit service-charge recovery of energy-related capital. The strongest of these are rare in current practice because they shift commercial risk in ways that have not yet stabilised in the market.

The implication for asset managers writing or renewing leases is that the green-lease question is not binary. It is a spectrum of drafting choices, each with different leverage. Light clauses are essentially zero-cost and should be standard. Mid-range clauses require some negotiation but materially change what the landlord can do over the life of the lease. Strong clauses require a bilateral commitment on both sides.

Where lease law and policy need to meet

The current UK policy framework treats the lease as a private matter and the energy performance of the building as a public matter. The thesis suggests that this division is increasingly artificial, because the lease is one of the determinants of energy performance.

Three policy moves would close the gap.

First, a standard green lease template for UK commercial offices, endorsed by RICS and the British Property Federation and tied to lender expectations. The market has shifted in this direction informally but unevenly. Explicit endorsement would help SMEs and secondary stock.

Second, an update to the RICS Service Charges in Commercial Property professional statement to clarify when energy improvements that change the running cost profile of a building can be recovered through service charge. The current ambiguity creates legitimate caution among landlords and excessive caution among others.

Third, mandatory data sharing between tenant and landlord above a defined size threshold, ideally aligned with whatever operational rating threshold the government settles on (Article 9 treats the operational rating question in detail). Without tenant-side data, the landlord cannot build the whole-building picture that NABERS-UK and equivalent schemes assume.

None of these moves is heroic. Each is closer to housekeeping than to revolution. Together they would reshape the legal plumbing in which commercial decarbonisation currently has to flow.

Limitations

Lease practice varies widely between firms and is not codified in a single source. The article relies on interviewee descriptions plus secondary literature. Legal frameworks (RICS, MEES, building regulations) change regularly. Any specific clause language quoted should be checked against current practice. The article is not legal advice. It identifies common patterns, not bespoke drafting solutions. Lease examples are anonymised, which limits the depth of case-level analysis a reader can do. The piece deliberately stays out of the politics of FRI versus institutional leases. A different audience would need a different cut.

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/

• Better Buildings Partnership (2014). Green Lease Toolkit. Available at: https://www.betterbuildingspartnership.co.uk/green-lease-toolkit

• 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

• Collins, D., Junghans, A., and Haugen, T. (2018). Green leasing in theory and practice.

• BEIS (2017). The non-domestic private rented property minimum standard. Available at: https://www.gov.uk/government/publications/the-non-domestic-private-rented-property-minimum-standard-landlord-guidance-documents

• BEIS (2018). Final Stage Impact Assessment: amending the Private Rented Sector Energy Efficiency Regulations. Available at: https://www.gov.uk/government/publications/private-rented-sector-minimum-energy-efficiency-standard-impact-assessment

Read next

• Article 6: The Split-Incentive Problem.

• 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?