Commercial Real Estate
Real Estate
Nickhil Mandora, Sophie Levitt
June 2026
Over the last few years, environmental, social and governance considerations have moved from being a desirable extra to a core driver in commercial real estate. A building’s Environmental, Social, and Governance (ESG) performance depends not only on the owner’s investment strategy and asset management, but also on how occupiers use, fit out and operate their premises. For that reason, the lease has become the principal document through which ESG responsibilities are allocated, monitored and, where necessary, enforced.
Why ESG Clauses Matter
Sustainability is now shaped by regulatory pressure, investor expectations, lender requirements and occupier demand for better-performing buildings. In practice, modern lease drafting is increasingly concerned with energy efficiency, environmental performance and the long-term management of assets. Many ESG negotiations are therefore not simply about principle, they are about allocating the cost and responsibility of achieving sustainability targets between landlord and tenant.
Energy and Environmental Data Sharing
One of the most common and important ESG provisions is the obligation to share energy and environmental data. These clauses typically require the parties to provide information about energy usage, utilities consumption, waste management and other environmental performance metrics. They are significant because they provide the foundation for wider ESG monitoring. Without reliable data, landlords and investors cannot set targets, measure progress or identify where improvements are needed across a portfolio. From the tenant’s perspective, however, these obligations can raise concerns about administrative burden, confidentiality and how operational data may ultimately be used. Even so, relatively straightforward reporting obligations can have major practical significance because they support broader compliance and sustainability strategies.
Collaboration and ESG Strategy Clauses
Historically, green lease clauses were often light-touch and one-sided, usually restricting tenant behaviour or reserving rights for landlords to carry out upgrades. Modern drafting is more collaborative. It increasingly requires landlords and tenants to cooperate on sustainability initiatives, act consistently with environmental objectives, and use reasonable endeavours to improve a building’s environmental performance. Although these provisions can be difficult to enforce if they are expressed only in general terms, they are still important because they establish a shared ESG framework within the lease. In that sense, they often act as the starting point on which more specific and measurable obligations are built.
Alterations, ESG Works and Cost Recovery
Another major area of ESG drafting concerns tenant fit-out and alterations. Clauses increasingly restrict works that would reduce an EPC rating, require the use of sustainable materials, limit the installation of energy-intensive equipment, or prevent interference with building systems designed to improve environmental performance. Alongside these restrictions, modern institutional leases often reserve rights for landlords to enter premises and carry out sustainability upgrades aimed at improving energy efficiency or wider environmental performance. These rights are important from an asset management perspective because they enable buildings to be upgraded over time without being wholly dependent on tenant consent. The commercially sensitive issue, however, is often not whether such works should be done, but who should pay for them. Service charge recovery for ESG improvements has therefore become one of the most negotiated parts of modern green leasing. Landlords commonly seek flexibility to recover the cost of energy-efficient upgrades, decarbonisation works and other environmental improvements, while tenants, particularly short-term occupiers, may resist contributing towards expenditure that appears primarily to enhance the long-term value of the landlord’s asset. This tension has led to more nuanced approaches, including payback models under which a landlord recovers the cost of improvements only to the extent that those works generate measurable savings for the tenant over time.
Takeaways
ESG clauses are significant not only because of regulatory developments, but also because they reflect changing expectations about how commercial buildings are owned, managed and occupied. Leases are now central to delivering sustainability in practice. As ESG requirements become more detailed and more closely tied to value, funding and compliance, a clear understanding of these provisions will be essential for landlords, tenants and their advisers alike.
If you are a landlord or tenant and would like advice on ESG clauses in commercial leases, please contact a member of our Commercial Real Estate team.
