Climate change in the Real Estate Industry

read time: 2 min

The impact of climate change is extensive and constantly evolving.  All businesses need to think about their climate change duties, the sustainability of business models and their future strategy. For the real estate industry, the pressure to address climate change is felt on a very practical level.

The recent Law Society guidance, 'The impact of climate change on solicitors', demonstrates the requirement for solicitors to be aware of climate change and to make proactive changes to address climate risk throughout their work. The guidance identifies three risk groups arising from climate change: physical, transition and liability risks.  All lawyers should be thinking about how to comply with, and discharge, the changing standards of their professional duties in relation to these climate change risks.

What does this mean for Real Estate?

Physical risks include extreme weather events such as flooding, storms, and heatwaves. As occupiers contend with these challenges, they may need to think about how they can adapt the space they occupy. An example could be an improved air conditioning or green energy options, together with managing the corresponding costs of doing so.

Transition risks are linked to the changes in law, policy and technology as we move towards a more sustainable economy. The government is committed to meeting the net zero target by 2050 and recent legislation demonstrates a commitment to addressing the sustainability of the built environment. Under the MEES (Minimum Energy Efficiency Standards) regulations, it is now unlawful to let commercial premises with an EPC rating below band E. If proposed further changes come into force, this will be band B by 2030. Occupiers may need to brace for rising rents as landlords make their buildings greener and look to recover the costs. Tenants should also be aware of the implications of ‘green lease’ clauses: reciprocal responsibilities for both landlords and tenants as they try to reduce their environmental impact.

Liability risks arise from exposure to the physical or transition risks which have caused losses to businesses or people. For those in the property sphere, the impact of complying with environmental obligations may cause difficulty insuring certain premises. It may also cause a shortage of commercial properties available on the market, as rents rise due to mounting costs faced by landlords.

Everyone should be thinking about their responsibilities in this changing landscape, as the drive for a more sustainable built environment continues to evolve. Whilst we wait for sector specific guidance and training from the Law Society, which will be invaluable to providing competent advice on climate legal risk in the real estate industry, all lawyers must ensure they are aware of their duties in the Law Society’s guidance.

For more information, please contact Tamara Paul.

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