ESG in Real Estate - Green Leases expert guide in Austria

Yes, EPCs generally need to be provided in the realm of the sale or lease of buildings or building premises in Austria. The legal framework for energy performance certificates (EPCs) and energy requirements in Austria is derived mainly from the EU Energy Performance of Buildings Directive EU/2010/31. EPCs provide insight into a building’s energy efficiency, rated from A++ to G. They are required for the sale and lease of a building, whereas the heating requirements and the overall energy efficiency factor must already be included when advertising for such building. New buildings or major renovations generally require EPCs. The components of an EPC are specific to the respective federal state (Bundesland). However, the components of a residential building’s energy certificate will normally include heating demand, primary energy demand, CO2 emissions, the overall energy efficiency factor, water heating demand, heating energy demand, and final energy demand.

The relevant legislation focuses primarily on new buildings and certain renovations. Also, the focus lays on the environmental aspect of ESG. The main laws to be observed in this regard are the following:

• Regional spatial planning act (Raumordnungsgesetz): Municipal zoning plans (Flächenwidmungsplan) must align with neighboring zoning to meet ESG and energy goals.
• Development plan (Bebauungsplan): Construction guidelines within municipality plans focus on efficient land use and settlement patterns.
• Register of contaminated sites (Altlastenatlas und Verdachtsflächenkataster): Sites posing health/environmental risks are identified in the register, informing site selection.
• Building Code (Bauordnung): State-specific codes cover permits, energy efficiency, and ESG factors like solar panels or EV charging.
• Environmental Impact Assessment Act (Umweltverträglichkeitsprüfungsgesetz, UVP-G) mandates assessments for specific property projects, evaluating biodiversity, air quality, noise etc.
• Renewables Heating Act (Erneuerbare-Wärme-Gesetz) stipulates a ban on the installation of heating systems based on fossil fuels.

Green leases have gained some popularity within the Austrian real estate market over the last years considering the pressure to observe self-imposed ESG commitments and to obtain green financing. This development has been market driven as there is no clear definition of a green lease prescribed by regulatory law. As a means for orientation, the Austrian real estate market tends to use the recommendations for the drafting of green lease agreements issued by the German real estate industry interest group ZIA (ZIA Zentraler Immobilien Ausschuss e.V.). In this sense, the “green” contents of a lease agreement must be aligned and adapted on a case-by-case basis as they regularly depend on the specifics of the respective property and the parties’ needs, especially regarding green financing and certifications. ZIA states however that a basic green lease agreement contains at least one provision regarding, in each case, the reciprocal exchange of data (e.g. waste production, energy and water consumption), the promotion of renewable energies (e.g. rooftop photovoltaic system), the resourceful use of water and energy (e.g. smart metering systems), the reduction of waste (e.g. recycling concepts) as well as the resourceful and environmentally sound performance of construction/repair measures (including modifications by the tenant). 
For the time being, green leases are predominantly implemented by means of commercial lease agreements that are excluded from the full applicability of the Austrian Tenancy Act (Mietrechtsgesetz, MRG). Lease agreements within the scope of the MRG are usually certain residential lease agreements or lease agreements for business premises that are subject to mandatory provisions impeding typical green lease provisions, such as additional ancillary costs for the sustainable operation of the property or termination grounds based on a breach of sustainability covenants. Further the Austrian Consumer Protection Act (Konsumentenschutzgesetz, KSchG) contains stringent requirements for B2C relationships. Both render the implementation of green leases for residential properties cumbersome. For the effective implementation of green leases for residential properties and commercial properties within the scope of the MRG, amendments to applicable statutory law would be necessary.

There are no generally applicable requirements as regards green lease drafting. The drafting may however be affected by already obtained or contemplated certifications of the building in question (e.g. BREEAM, LEED, ÖGNI, ÖGNB, klimaaktiv). Certifications may also be demanded by banks/investors for the purpose of granting green financing under the EU Taxonomy Regulation. Consequently, the substance and usage requirements stipulated by such certifications are also the requirements (indirectly) demanded by banks and investors. Pertaining to the standard approach to green lease drafting, the Austrian real estate market tends to use the recommendations issued by the German real estate industry interest group ZIA (ZIA Zentraler Immobilien Ausschuss e.V.). ZIA states that a basic green lease agreement contains at least one provision regarding, in each case, the reciprocal exchange of data (e.g. waste production, energy and water consumption), the promotion of renewable energies (e.g. rooftop photovoltaic system), the resourceful use of water and energy (e.g. smart metering systems), the reduction of waste (e.g. recycling concepts) as well as the resourceful and environmentally sound performance of construction/repair measures (including modifications by the tenant). Subject to the obtained or contemplated certification, further provisions may be required.

Since the emergence of ESG considerations, we have pointed out ESG factors in our legal due diligence reports on a sector-based approach; i.e. in relation to transactions with target companies/operations engaged in high-impact activities such as industrial production of goods or real estate development/construction. We expect that with the imminent transposition of the Corporate Sustainability Reporting Directive (CSRD; Directive 2022/2464/EU) into Austrian law and the pending enactment of the Corporate Sustainability Due Diligence Directive (CSDDD), ESG factors in real estate transactions will play a bigger role and raise the market’s expectations regarding green lease agreements. Hence, we expect that any lack of green lease provisions will be regularly pointed out as a red flag in legal due diligence reports in the long term.

Green lease provisions may be drafted as (i) non-binding declarations of intent or (ii) binding obligations of the tenant and/or the landlord. As regards the first case, such declarations of intent may still be used to construe the contract in case of ambiguities or contractual gaps. Notwithstanding the foregoing, the core of a green lease agreement are usually provisions binding the landlord and/or the tenant to fulfil certain obligations pivotal for the sustainable lease and sustainable use of the property/lease object. Such binding obligations may be enforced by damage claims, by imposing contractual penalties (e.g. for a breach of a data exchange obligation), damage claims (e.g. in case the certification is revoked) and/or by including the breach of green lease obligations as termination grounds (e.g. for repeated breaches of waste management obligations).

Apart from mandatory EPCs, voluntary certifications like BREEAM, LEED, ÖGNI, ÖGNB, and klimaaktiv are generally recognized in the Austrian real estate market and in most cases also demanded by commercial tenants and investors. These certifications are voluntary and assess diverse criteria including sustainability, energy efficiency, materials, and air quality. While not prescribed by regulatory law, they can indicate ESG compliance and make the case for green financing under the EU Taxonomy Regulation. Usually such certification would be included into the lease agreement as a feature of the property.

Depending on the size and capacity of a rooftop photovoltaic (PV) system, approval by or notification to the relevant authority may be necessary under the building code (Bauordnung) of the federal state (Bundesland) where the property is located. This hinges on factors like zoning, building plans, and neighbours’ rights. The EU Solar Rooftops Initiative, aligned with the REPowerEU plan and solar energy strategy, mandates the gradual installation of solar energy systems on various buildings, starting with new public, commercial, and residential structures. This stems from the EU’s Energy Efficiency of Buildings Regulation (2010/31/EU), implemented in Austria through the building codes of the federal states, and requiring PV systems for certain projects.

Upgrading rooftop photovoltaic systems in condominium buildings benefits from administrative facilitations under the 2022 amendment to the Condominium Act (Wohnungseigentumsgesetz, WEG). For individual systems, an owner can inform others about the planned installation, with no objections after two months implying consent. Shared systems require a majority of co-ownership shares or two-thirds of votes cast for installation in the common interest. If a rooftop photovoltaic system is established for profit or benefit, it is considered a commercial facility under the Trade Regulation Act (Gewerbeordnung, GewO), potentially requiring a trade license and operation permit. Operation of such a system could also fall within the scope of the Electricity Industry and Organisation Act (Elektizitätswirtschafts- und Organisationsgesetz, ElWOG) stipulating further regulatory obligations.

Certain projects whose realisation is likely to have a significant impact on the environment must undergo a systematic assessment procedure, namely the environmental impact assessment. The Environmental Assessment Act (Umweltverträglichkeitsprüfungsgesetz, UVP-G) provides in its Annex I for 89 types of projects for which an environmental impact assessment may have to be carried out. Breaches of the Environmental Assessment Act are sanctioned by administrative penalties up to EUR 35,000. Depending on the case at hand, actions leading to a detrimental impact on the environment may be deemed criminal offences subject to the Austrian Criminal Code (Strafgesetzbuch, StGB) and be sanctioned with fines or (even) prison sentences.