What does ESG mean for your next lease decision?

Owners, occupiers and investors of UK real estate are entering a new era of accountability, driven by tightening environmental regulations, evolving sustainability reporting standards, and rising stakeholder expectations.

From investors demanding climate resilient assets to tenants seeking energy efficient spaces, the pressure to reduce the environmental impact of built assets, whilst improving the value both financially and socially of the property is intensifying.

Irwin Mitchell’s recent survey of office occupiers confirmed that whilst occupational numbers are on the up, with social capital being a driving force behind that rise in attendance in the office, owners and occupiers of commercial space are looking to drive down the carbon impact of those buildings without incurring considerable costs. In short, owners and occupiers and looking for cost-effective solutions from their real estate to reduce their carbon and increase their profit and social capital.

From a carbon perspective, a corporate’s office is a major contributor to emissions, as well as being the space from which its stakeholders operate or visit. The office is therefore the embodiment of the organisation’s image and sets the framework in which it operates.

Against this backdrop, the importance of understanding how you can use your premises to reduce your carbon and increase your productivity and social capital through better use of the space, M&E and wider facilities in the building, whilst improving your corporate reporting objectives, is rapidly becoming a crucial consideration.

All organisations therefore need to have a proper property strategy based around the lifecycle of the space they occupy. It needs to be one that aligns with regulatory reporting timelines, capital investment plans and carbon reduction targets, as well as employment and corporate growth strategies. Decisions made at the point of lease negotiation or renewal now carry long-term implications for legal compliance, financial performance, and environmental impact, which will increasingly have an evolving role in corporate reporting obligations.

Understanding the legal implications of leasing decisions

The legal landscape surrounding commercial leases is undergoing change, shaped by the UK’s sustainability agenda and broader regulatory reform. New reporting requirements, such as the UK Sustainability Reporting Standards (UK SRS), are expected to mandate disclosures on climate-related risks, governance, and transition planning. These standards will influence how lease agreements are structured, particularly in terms of environmental responsibility and data transparency.

The UK SRS   is currently in consultation, with earliest application expected for accounting periods beginning on or after 1 January 2026, although this is still to be confirmed. These standards will initially apply to the largest listed and private companies. However, even businesses not directly subject to the standards will be affected through value chain reporting. Companies required to report under UK SRS will need to disclose material sustainability-related risks and opportunities across their entire value chain and will need to disclose Scope 1, 2 and 3 greenhouse gas emissions, which includes those generated by their leased office space. This makes the carbon performance of commercial properties a material consideration in lease negotiations. These carbon considerations are explored further below.

Other legal considerations include the growing use of green lease clauses, which require tenants and landlords to collaborate on sustainability initiatives such as energy data sharing, waste management and permissions for retrofit works. Compliance with energy performance standards is also becoming more pressing, with the Minimum Energy Efficiency Standards tightening and a proposed requirement for EPC B ratings likely from 2030, a date which is now within the standard lease cycle. While there is a genuine desire from both tenants and landlords to remain compliant, they are increasingly considering what impact such decisions can have on their reputation and brand. As a result, lease structures are evolving to support ESG aligned business models, with increased demand for flexibility through shorter lease terms, break clauses and adaptive rent mechanisms.

Lease agreements must therefore be forward looking, anticipating regulatory shifts and embedding ESG obligations in a way that is enforceable and commercially viable.

Evaluating the financial impact of ESG commitments

Financial planning within the lease cycle should now account for the cost implications of ESG compliance and sustainability upgrades. These costs can take various forms. For example, operating expenses such as utilities, maintenance and insurance may be reduced over time through improvements like energy efficient lighting, heating and air-conditioning or smart building systems. With that comes the need to think about capital expenditure in building enhancements, such as renewable energy installations or low-carbon heating systems. Such capital expenditure can improve asset value and environmental performance and may also qualify for tax reliefs or grants.

How these costs are treated within lease agreements is critical. Some leases allow recovery of capital investments through service charges but only in relation to repair or maintenance, while others restrict recovery to ongoing operational costs. This affects the financial viability of sustainability measures and determines how risk and responsibility are shared between parties.

Additional financial considerations include the payback periods for ESG-related investments, the potential impact on asset valuation and rental yields, and the availability of green finance options. These may include sustainability linked loans, which offer favourable terms based on meeting environmental performance targets, or green property funds that support low carbon retrofit projects. Accessing these can help reduce upfront costs and accelerate the transition to more sustainable leased spaces but whether they are cost effective or achievable will depend on the specifics of the property and where it is within the lifecycle.

When making these decisions, it is also worth seeking guidance on the available tax relief that could be available to you.

Accounting for carbon in lease structures

Carbon accounting is now a central component of any ESG strategy, and lease structures play a significant role in determining how emissions are measured and reported.

The classification of a lease, whether operating or finance, affects the allocation of emissions under the Greenhouse Gas Protocol (GHGP):

• Finance leases, where the tenant has control similar to ownership, typically result in Scope 1 and 2 emissions being reported by the tenant
• Operating leases, where the landlord retains control, result in Scope 3 emissions for the tenant.

This distinction is crucial for organisations setting science-based targets or reporting under frameworks like GHGP or UK SRS. Accurate emissions reporting requires clarity on operational control, energy use and data availability.

Other carbon considerations within the lease cycle include establishing baseline assessments of building emissions to understand current performance and identify areas for improvement. While opportunities for decarbonisation, such as electrification of heating systems or integration of renewable energy sources, can be explored as part of lease planning and property upgrades. Careful consideration however needs to be given to the viability within the lifecycle of these alterations, whether they can be carried out and what consents are required. In addition, thought needs to be given to whether reinstatement of any alterations will be required and what impact this will have on the carbon accounting.  Data sharing agreements must also be put in place to support transparent and reliable reporting, particularly where emissions disclosures are required under sustainability standards.

Lease agreements must facilitate access to energy data and support the implementation of carbon reduction measures. Without this, tenants may struggle to meet their ESG commitments or face reputational and regulatory risks.

Making ESG central to lease strategy

The lease cycle is no longer a routine commercial event. It is a strategic opportunity to align property decisions with ESG objectives. Legal frameworks must accommodate sustainability obligations, financial models must reflect the cost-benefit of ESG investments, and carbon accounting must be embedded into lease structures.

Now more than ever owners and occupiers need to align their property, financial, growth and employment strategies, and embrace the concept that proper management of their premises throughout the whole lifecycle of the lease, can be a crucial tool in enabling them to achieve their financial reporting goals, as well as their wider commercial and ESG objectives.

Navigating these complexities requires a multidisciplinary approach. By combining legal insight, financial analysis and carbon accounting expertise, organisations can ensure that their lease decisions are compliant, cost effective and climate conscious.

For more information about how you can make ESG central to your lease strategy, contact us today.  You can also find out more about the ESG services we provide and how they can help you here.