Overriding Interest

What is a Green Lease?Reducing the environmental impact of property is very much at the forefront of the

government’s drive to cut the UK’s carbon emissions. Energy Performance Certifi cates have

already been introduced, and with another deadline for compliance of 1st July looming,

these regulations are clearly here to stay. EPC’s are just one example of the green agenda

impacting on the commercial property sector. The past decade has seen a major change in

this agenda and environmentally friendly initiatives, and the issues of sustainability for future

generations, will have an increasing impact. Will one of the environmental initiatives be the

introduction of a green lease and is this a concept which landlords and tenants are likely to

be keen to embrace?

A green lease is a lease of a commercial or public building which incorporates an agreement

between the landlord and tenant as to how the building is to be managed, occupied and improved

in a sustainable way, using principles that incorporate ecologically sustainable development policies.

These principles help to ensure that any negative impact on the environment is minimised.

Green leases were fi rst developed in Australia in the form of a green lease schedule by the Australian

Department of the Environmental and Water Resources and the Australian Government Solicitor. This

requirement for a schedule became mandatory from September 2006 and has since expanded to

incorporate the private sector as a voluntary initiative.

Now in the U.K., certain members of the industry are calling for the introduction of a “green

lease”. The green lease would provide incentives to the landlord and the tenant to reduce energy

consumption and adhere to effi cient energy management practices, such as increasing recycling,

building with environmentally friendly materials when installing tenant improvements and complying

with other environmentally friendly terms. A major driver to the introduction of a green lease could be

the substantial commitment to sustainability in the Corporate Social Responsibility (CSR) programmes

of many of the UK’s large tenants and landlords. Green leases could enhance a company’s

environmental image and profi le. So just what sort of provisions would a green lease contain?

1. benchmarks for environmental performance by both landlord and tenant in the landlord’s and

tenant’s covenants. The rent could be increased or decreased dependent on whether the

benchmarks are achieved;

2. lease terms or separate regulations would govern materials used for repairing or altering the

building together with policies on air quality, air conditioning, recycling etc;

3. clauses dealing with the impact on rent review, service charge recoverability and the tenant’s

ability to assign as a result of “green clauses” would need to be considered.

So, other than a achieving a good CSR rating just what is the benefi t for a landlord or tenant in

adopting a green lease? The answer is straightforward. Cost savings over the long term, will be

achievable for both parties. Tenants should benefi t from decreased service charges, whilst landlords

should be able to maximise the long term return on investment obtained from a particular building

with green credentials. At this stage the challenge seems to be raising awareness of green leases.

Understanding the environmental impacts of energy saving initiatives on buildings and committing to

follow sustainable principles seem key to driving change.

Lawyers to the real estate industry

Summer 2008

In this issue:What is a Green Lease? ....................... 1

Hot in the City ..................................... 2

Legal Cases ......................................... 3

Deals .................................................. 4

Kirkpatrick & Lockhart Preston Gates Ellis LLP

110 Cannon Street

London EC4N 6AR

www.klgates.com

T: +44 (0)20 7648 9000

F: +44 (0)20 7648 9001

2 Overriding Interest

This is the time of year when the British weather (during its rare fi ne spells) exposes the

limitations of the air-conditioning systems in many offi ce buildings. With multi-tenanted

buildings, it is usual for the landlord to repair and maintain the a/c system with the tenants

paying the landlord’s costs through the service charge. All is well when the system works. But

when it fails, tenants can fi nd themselves in the frustrating position of suffering in unbearable

conditions but having no direct control over the remedy. Disputes can arise as to whether

the landlord is performing its lease obligations, and tenants frequently want to know their

remedies if the landlord is in breach. So what are a tenant’s remedies?

The main remedies available to a tenant

are damages, self-help, set-off and specifi c

performance:

DamagesA faulty a/c system may severely impact on a

tenant’s staff and business. If the landlord is in

breach, the tenant can claim damages to put

it in the position it would have been had there

been no breach. Those damages can cover

inconvenience and discomfort (which is often

assessed by reference to the rental value of

the premises), any ill-heath caused to the staff,

damage to personal belongings or the tenant’s

property (through, for example, water leaks)

and, of course, loss of profi ts. If the problems

with the a/c system are so severe that the tenant

has to vacate, it can also claim for the cost of

alternative accommodation, the cost of moving

and again any loss of profi ts suffered.

Self-helpSelf-help involves the tenant carrying out repair

works itself and then seeking to recover the

cost from the landlord. If the problem with the

a/c system is within the tenant’s demise, then

it may well be possible for the tenant to adopt

this remedy. However, if, as is usually the case,

the problem is outside of the demise and within

the common parts of the building and if, as is

also usual, there is no express right of entry to

repair the common parts in the tenant’s favour

in the lease, then the tenant should be cautious

about undertaking the work itself. It could be

committing a trespass if it were to do so.

Set offSet off is where the tenant makes a deduction

from the rent or other sums payable to the

landlord under the lease. The tenant may seek

to recover the damages it has suffered as a

consequence of the problems with the a/c

system by making a deduction from its rent or

service charge payments of an amount which

refl ect those damages. Similarly, if the tenant has

adopted a self-help remedy and has incurred

costs through employing experts and contractors,

again, it may seek to set-off those sums against

the payments due to the landlord under the

lease. However, many leases exclude the right

of set off, so a tenant should consider its lease

carefully before adopting this remedy.

Specifi c performanceSpecifi c performance is a Court Order

compelling a party to comply with its

obligations. Here, it would be to compel the

landlord to repair and maintain the a/c system

in accordance with its lease covenants. It is,

however, a discretionary remedy and the tenant

would have to establish, amongst other things,

that damages would not be an adequate

remedy and that it would be just and equitable

in the circumstances to grant such an Order.

ConclusionThere are remedies available to tenants who fi nd

themselves sweltering in the middle of summer

with no effective air-conditioning. Problems

should be brought to the landlord’s attention

at an early stage and, if no effective

response from the landlord is received,

further legal advice should be sought on the

most suitable options for proceeding.

Hot in the City

Summer 2008 3

Legal Cases

Business TenanciesWhere a business tenant used a leased site in

breach of planning and had several enforcement

notices served on him, it was held that the

landlord was entitled to recover possession on

ground 30(1)(c) of the 1954 Act.

Comment: The Court refused to sanction the

tenant’s continued illegal use of the site.

Fowles - v- Heathrow Airport, ChD

ForfeitureA landlord, following judgment in its favour

for arrears and an unlawful assignment of

the lease, demanded that the assignor pay

the arrears. The assignor failed to pay and

the lease was forfeited. It was held that the

demand for the arrears had not waived the

landlord’s right to forfeit.

Comment: No unequivocal demand for payment

had been made from the tenant, the assignee.

Greenwood Reservation - v - World Environment

Foundation, CA

Service ChargesAfter the end of a service charge year in which

on-account demands had been served and

paid by a tenant, the landlord made a demand

for an additional payment that was omitted in

error from the fi nal schedule of expenditure. It

was held that the tenant was not liable for the

additional sum.

Comment: Recovery could still be made by the

landlord if a revised fi nal schedule was served.

Leonora Investment Company - v - Mott

Macdonald, QBD

Rent ReviewsWhere a rent review clause in the lease of

a drive-through restaurant required it to be

assumed that the property was a “modern

warehouse”, it was held that the assumed

planning use was that of a warehouse, but with

the potential for retail use.

Comment: The Court considered the state of the

warehouse and retail warehouse markets at the

date of the lease in reaching its decision.

McDonalds Real Estate - v - Arundel

Corporation, ChD

Business TenanciesThe tenant of business premises had a right

contained in a document separate to its lease

to park outside the demised premises but, on

renewal, sought to have that right included in

its new lease. The Court held that the tenant

had no automatic right to have its parking rights

incorporated in the new lease.

Comment: The Court had a discretion under

section 35(1) of the 1954 Act to incorporate the

right but refused to exercise it.

Picture Warehouse - v- Cornhill Investments, QBD

Estate ManagementA management company that controlled an

industrial estate imposed an overnight parking

levy to pay for the commercial rates charged by

the local authority on the car park and to relieve

congestion. The Court dismissed the complaints

of the tenant hardest hit by the levy as it could

not establish that the levy was unreasonable.

Comment: The motive for the scheme

was irrelevant.

Shah - v - Colvia Management Company, CA

4 Overriding Interest

Home House We acted for Quintillion UK Limited in relation

to the refi nancing of £14m of bank debt, which

is secured over (inter alia) the property and

assets of the Home House private members club

(Portman Square). Richard Williamson acted on

the banking aspects of the transaction, assisted

by Rebecca Bailey. Steven Cox acted in relation

to the property aspects of the transaction. Steven

also recently acted for Home House on an

agreement with the Portman Estate for a lease

of additional premises at Portman Square to

expand the club.

Deals

Nationwide CommercialA team comprising lawyers from the London and

Berlin offi ces has completed its fi rst instruction

for Nationwide Commercial in connection

with loans secured against German real estate

assets. The €52million senior loan facility to

Luxembourg subsidiaries of Parkwood Europe

LLP has been used to help fund the purchase

of six properties in Germany. K&L Gates real

estate fi nance partners Jonathan Lawrence

(London) and Georg Foerstner (Berlin) led the

team, assisted by Duncan Batty (London) and

Christiane Feldhaus and Anja Rösch (Berlin).

Anglo Irish BankWe acted for Anglo Irish Bank Corporation plc

in relation to a c£190 million refi nancing facility

to Revelan Group plc, an Isle of Man based

company, secured on a portfolio of industrial

and commercial properties in the UK. Richard

Williamson acted on the banking aspects of

the transaction, assisted by Gareth Lawson.

Fiona McPhillips acted in relation to the property

aspects of the transaction.

Capital and CityWe acted for Capital & Conduit LLP in relation to

the acquisition of, and c£40 million fi nance of, 2

Properties located in the West End. The deal was

led by Melanie Curtis, a Partner in the real estate

group and Richard Hardwick, a Partner in the

banking department.

K&L Gates comprises approximately 1,500 lawyers in 25 offi ces located in North America, Europe and Asia, and represents capital markets participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations and public sector entities. For more information, visit www.klgates.com.

K&L Gates comprises multiple affi liated partnerships: a limited liability partnership with the full name Kirkpatrick & Lockhart Preston Gates Ellis LLP qualifi ed in Delaware and maintaining offi ces throughout the U.S., in Berlin, in Beijing (Kirkpatrick & Lockhart Preston Gates Ellis LLP Beijing Representative Offi ce), and in Shanghai (Kirkpatrick & Lockhart Preston Gates Ellis LLP Shanghai Representative Offi ce); a limited liability partnership (also named Kirkpatrick & Lockhart Preston Gates Ellis LLP) incorporated in England and maintaining our London and Paris offi ces; a Taiwan general partnership (Kirkpatrick & Lockhart Preston Gates Ellis) which practices from our Taipei offi ce; and a Hong Kong general partnership (Kirkpatrick & Lockhart Preston Gates Ellis, Solicitors) which practices from our Hong Kong offi ce. K&L Gates maintains appropriate registrations in the jurisdictions in which its offi ces are located. A list of the partners in each entity is available for inspection at any K&L Gates offi ce.

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without fi rst consulting a lawyer.

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