Decarbonisation of the French real estate sector: a win-win for landlords and tenants

The climate emergency is one of the biggest challenges faced by society today. With real estate responsible for almost 40% of greenhouse gas emissions globally, the sector's role in the transition to a net-zero economy has been brought into sharp focus.

In France, whereas corporate social responsibility policies are increasingly committing businesses to improve the environmental performance of their buildings, public authorities are also imposing greater energy saving and efficiency standards, requiring key stakeholders to take stock of their carbon footprint.

But what are the legal challenges of carrying out energy improvement works to buildings that are occupied by tenants? Are landlords entitled to carry out such works, or are they required to wait for tenants to vacate? Who bears the cost of the works, or should the cost be shared?

New contractual products are emerging to address these challenges. One such product is the energy performance contract (EPC), which involves the service provider who carries out the work bearing the cost of the work and then being remunerated on the basis of the energy savings achieved.

Of course, such products are not without challenges of their own. They throw up questions such as how should the residual term of the lease align with the term of the EPC? Who owns the equipment installed and does this remain unchanged throughout the lifecycle of the equipment? What method of rent calculation should apply to a building that has undergone energy improvement works?

Two things are clear: (1) the sector must embrace an innovative approach to financing decarbonisation; and (2) it must implement new contractual agreements between the parties involved. We seek to illustrate the practicalities of (1) and (2) below.

1. An innovative approach to financing decarbonisation

2. Contractual implementation