ESG in Real Estate - Green Leases expert guide in Croatia

EPC (energetski certifikat) is a standardized document that provides information about the energy efficiency, confirming the amount of energy necessary for meeting the energy needs of the building. EPCs are required for sales and lettings in Croatia, in accordance with statutory requirements outlined in the Building Act (Zakon o gradnji). EPC must be obtained prior to obtaining a use permit and prior to the change of ownership or lease of the building. Real estate agencies are obliged to indicate in their marketing materials the EPC ratings of the building or its part thereof. The EPC is valid for ten years from its issuance. 

There is no statutory minimum requirement in terms of minimum EPC rating for the existing buildings, but all new buildings, starting from the end of 2019, must have “nZEB” rating (i.e. must fulfil prescribed criteria for almost zero energy buildings (zgrade gotovo nulte energije)).

According to the Croatian Building Act (Zakon o gradnji), every building, depending on the type and purpose, needs to fulfil certain energy efficiency requirements and must be designed, constructed and maintained in a manner that allows the preservation of the required energy efficiency requirements during the term of its use.

All new buildings must be an almost zero energy buildings (zgrade gotovo nulte energije), i.e. a building that has very high energy properties. This near-zero or very low amount of energy should be covered to a very significant extent by energy from renewable sources, including energy from renewable sources produced on or near the building.

Furthermore, there is a number of requirements for energy efficiency, including the requirements regarding energy savings and thermal protection, light fixtures and sustainable energy, applicable to the new buildings (and the existing buildings in which reconstructions and significant renovations are being carried out), prescribed under the Technical Regulation on Rational Use of Energy and Thermal Protection in Buildings (Tehnički propis o racionalnoj uporabi energije i toplinskoj zaštiti u zgradama) and other technical regulations. In addition, for such types of buildings, the law provides for mandatory electric vehicle charging infrastructure, with variations depending on the type of building and number of units in the building.

Additionally, older buildings are also subject to energy efficiency requirements, such as the installation of devices for regulating heat output and devices for local distribution of delivered thermal energy (distributor) or meters for measuring thermal energy consumption, for certain buildings.

In Croatia, green leases are not regulated by a specific law. Instead, parties of the lease agreements are developing their own set of guidelines regarding sustainable asset management, energy savings, green cleaning, indoor air cleaning, quality, sustainable purchasing, solid waste management and water protection. These guidelines are created having in mind the parties’ internal ESG policies and standards and requirements of financing institutions with respect to green financing, integrating also the requirements of different laws regulating specific areas, such as energy efficiency, waste management, environmental protection etc.

Provisions regulating green leases can predominantly be found in commercial leases, even though the general appearance of green lease provisions on the Croatian market is rather shy (and concerns only major projects). In our experience, the green lease provisions in residential leases are quite rare, but we see that the landlords are becoming increasingly aware of the importance of ESG principles, mostly through energy savings and waste management.

While there is no standardized approach to green lease drafting, investors and/or banks require compliance with recognized sustainability standards / building certificates (e.g. BREEAM, DGNB, LEED etc.) and specific environmental clauses depending on their internal policies. Generally, development of projects respecting the ESG standards can be easier backed by the financing institutions, who are currently pushing green products.

During the due diligence exercise we would analyse and report the lack of green lease provisions only if specifically instructed by the client. Otherwise, we would normally analyse the compliance with environmental regulations only within the general analysis of the target’s compliance with mandatory laws. 

Enforcement of green lease provisions in Croatia relies mostly on contractual obligations agreed between landlords and tenants. In case one of the parties does not comply with the green lease provisions, the other party can sue, demanding from the court to order to the other party to comply with such provision, and compensate damages arising from such breach. In some circumstances, non-compliance with the green lease provisions may also give party the right to unilaterally terminate the lease agreement.  

Certification of the buildings is quite widespread in Croatia with respect to new buildings, especially built-to-suit buildings. In our experience, the certifications used most often are BREEAM and DGNB. They are not regulated by the Croatian law nor they are mandatory, but are purely market driven. The obligation that a green certificate (of a certain raking) is issued for the leased building is usually contained in the lease agreement as the obligation of the landlord. At the same time, the tenant is usually undertaking an obligation to co-operate with the landlord, to perform fit-out works in line with the requirements of the certificate and/or not to obstruct the issuance of the certificate in any way.

The grid connection agreement must be signed with the competent grid operator (DSO/TSO), and the electro-energy consent must be obtained (elektroenergetska suglasnost). The alternative energy supply system may potentially require location permit (lokacijska dozvola), a building permit (građevinska dozvola) and a use permit (uporabna dozvola) depending on the type of construction as outlined in the Building Act (Zakon o gradnji) and the Regulation on Simple and Other Buildings and Works (Pravilnik o jednostavnim i drugim građevinama i radovima). Once the construction is completed if the alternative energy supply system meets the requirements outlined in the Electric Energy Market Act (Zakon o tržištu električne energije) an electric energy production permit (dozvola za obavljanje energetske djelatnosti proizvodnje električne energije) must be obtained. The requirements under the Electric Energy Market Act relate to technical specifications of the alternative energy supply system (e.g., connecting power, metering point parameters). 

Croatian law does not have a specific act regulating the soil artificialization and biodiversity concerns – however, tourism boom and increased construction which followed increased awareness about this issue in the last few years. In Croatia, these topics are regulated and enforced through spatial planning laws and documents and environmental regulations. For example, Environmental Protection Act (Zakon o zaštiti okoliša) mandates assessments of environmental impact, evaluating factors such as soil protection, biodiversity, air quality, and more. The Spatial Planning Act (Zakon o prostornom uređenju) and spatial planning documents impose rules with the aim to limit soil artificialization, such as imposing quotas for the increase of zones intended for construction, setting out definition of minimum percentage of green areas for certain construction project, defining guidelines for building design, etc. 

Compliance is overseen by relevant governmental bodies, with prescribed fines or even criminal charges for non-compliance outlined in the applicable legislation, aiming to protect natural ecosystems and promote sustainable development practices.