The Report focuses on a number of efforts and strategies that are needed to bring the buildings and construction sector on track to meet Paris Agreement goals. These include an urgent need to increase the rate of building energy efficiency retrofits, and the adoption of green leasing.
In depth
Retrofitting
The Report highlights the low rate of retrofitting in the built environment sector. It notes that, although retrofits are "pivotal for reducing emissions in the built environment sector … the news is not encouraging, with a current retrofitting rate of about one per cent per year, against a required 5–10 per cent annually." (pages 17 and 79)
As a call to action, we need to "Triple the rate of energy efficiency retrofits and upgrades of existing buildings by 2030 to shift the energy use intensity of buildings towards the goal of 96 kWh/m²/yr, which requires achieving a 35 per cent reduction in energy intensity from current levels." (page 79)
Baker McKenzie was pleased to join a panel discussion on retrofitting at MIPIM 2025 on 13 March 2025, organized and hosted by JLL, in which speakers and participants examined why retrofitting rates are currently so low. Our panelist, Senior Knowledge Lawyer Katherine Lang, suggested several reasons from a lawyer's perspective which might hinder retrofitting in the commercial sector.
These included the rigidity of the traditional landlord-tenant relationship. During a lease term, it can be difficult for lease parties to be motivated to undertake a light retrofit where capital expenditure by the landlord reduces operational expenditure by the tenant: the so-called split incentive problem. For the same reason, investors and landlords may not be eager to undertake a deep retrofit when a building is vacant, unless motivated by legislative push factors (such as regulations mandating minimum energy efficiency standards), or internal Environmental, Social and Governance (ESG) pull factors.
One solution to this is a "green lease". Fundamentally, a green lease introduces the concept of collaboration between the lease parties to improve energy efficiency of the premises, and many green leases will mandate data sharing. Introducing energy efficiency expectations at the start of the lease means that a recommendation for an energy-efficiency retrofit of certain equipment would be more palatable to the leasing parties. Moreover, both sides would have access to data to demonstrate the ROI of the project. The service charge provisions might also contain a pre-agreed position on how the capital expenditure of a retrofit will be shared between the parties, depending on the payback period for example.
Green leasing
It is therefore positive that the Report makes several references to green leasing, noting that this is driving growth in low-carbon office spaces. The Report highlights that "Green leasing is emerging as an important strategy in the transition to sustainable buildings, aligning tenant and landlord interests to achieve decarbonization goals."
It adds: "To enhance the adoption of green leasing, collaboration between landlords and tenants is essential for integrating sustainability goals into leasing agreements. Green leases, which include specific carbon performance criteria, offer a framework to align tenant and landlord efforts."
Citing the Green Building Alliance, the Report also notes that: "To address gaps within the real estate leasing sector, fostering collaboration between landlords and tenants for retrofits, integrating sustainability into leasing decisions and leveraging innovative tools like green leases and performance-based frameworks will better support sustainable building demand (Green Building Alliance 2024). Aligning lease agreements with decarbonization targets can catalyse market shifts, benefiting occupiers and investors while contributing to global carbon neutrality efforts." (pages 25-26)
Increasingly, we are asked to advise our clients on "green" lease provisions such as cooperation, data sharing, sustainable use, and works to the premises. In many jurisdictions, negotiation of a suite of "green" clauses is now standard practice for any new lease.
Baker McKenzie is a proud member of the Better Buildings Partnership Green Lease Toolkit Legal Working Group. This is a pro bono collaborative taskforce comprised of expert lawyers from leading law firms. The Working Group leads best practice in green leasing, and has prepared standard form green lease clauses, alongside comprehensive drafting notes, which are now being adopted in many lease transactions in the United Kingdom and internationally.
Our Real Estate team has also recently undertaken a comprehensive review of green leasing in Germany, in partnership with Savills. You can read more about this project here: Germany: Baker McKenzie and Savills survey shows increasing uptake of Green Leases - Baker McKenzie InsightPlus.
How can the real estate sector get on track?
A passive approach will not bring the building and construction sector on track to meet Paris Agreement goals. As the Report notes, increased efforts are needed around energy efficiency retrofitting, and an increased uptake of green lease arrangements is an important strategy to drive transition.
Our Baker McKenzie lawyers are able to provide expert advice in both these areas. Please get in touch with your usual Baker McKenzie contact, or the authors of this article, to discuss how we can help you to drive change for your real estate portfolio.
