ESG in Real Estate - Green Leases expert guide in France

Yes, EPCs are mandatory for all sales and lettings of residential or commercial properties in mainland France and must be provided to all potential buyers or tenants. 

However, it is not required in certain exceptional cases such as: temporary constructions, residential properties used less than four months a year etc.

For commercial properties: 

There is currently no minimum performance standard required.

For residential properties:

Since 25 August 2022, the rents of properties rated F or G can no longer be increased. As of 1^st January 2023, properties consuming more than 450 kWh of final energy per square meter and per year can no longer be let.

Residential properties rated between E and G will also be banned from the rental market starting:

• 1^st January 2025 for G-rated properties;
• 1^st January 2028 for F-rated properties; and
• 1^st January 2034 for E-rated properties.

No minimum performance is required when selling residential properties.

No, there are no ESG requirements applicable to new or existing buildings.

Various recent legal provisions have been introduced with the aim of ensuring energy transition. For instance, to reduce carbon emissions from buildings, the new construction sector must comply with the “RE2020” environmental regulation. This regulation notably applies to residential, office and primary or secondary education buildings since 2022 and will progressively be extended to other building uses. There are also obligations to reduce energy consumption in new and existing tertiary buildings, as offices, education, hotels, shops, in accordance with the Tertiary Decree dated 1^st October 2019 (cf. question 3). Other legal provisions require the installation of renewable energy production systems or of a green roof system on certain buildings, as warehouses and offices bigger than 1,000 sq.m or 500 sq.m depending on surface areas (cf. question 7 below). 

Commercial leases:

There are two main mandatory rules on green provisions that apply to commercial leases: (i) the Green Appendix and (ii) the Tertiary Decree.

The Green Appendix applies in the same way as the other provisions of the lease, and provides for the following:

• Sharing of information and data between landlord and tenant concerning the consumption of all energy sources (water, electricity, gas, etc.) as well as the quantity and management of waste;
• Collaboration to improve the building's environmental performance (particularly in the following areas: waste, water, energy, indoor air quality).

In practice, landlord and tenant will hold at least one meeting a year to assess the building’s situation and define a program of actions to improve its energy and environmental performance.

The main aim of the Green Appendix is to better control fluid consumption, waste management, greenhouse gas emissions and air quality for users.

In our experience, it is market practice for landlords to include a Green Appendix in their leases, if premises are not subject to this obligation legally (e.g. logistic premises and data centres).

One of the main objectives of this Decree is to reduce the energy consumption of tertiary buildings (offices, education, hotels, shops, sports and entertainment venues, etc.) by achieving either (i) a relative value target: by 40% in 2030, 50% in 2040 and 60% in 2050, compared with the consumption data for a full operating reference year of operation that cannot be earlier than 2010 or a target in absolute value: by each of the years 2030, 2040 and 2050 of a level of final energy consumption set in absolute terms, based on the energy consumption of new buildings in their category..

Targets can be adjusted to take account of:

• Technical, architectural or heritage constraints relating to the buildings concerned;
• A change in the activity carried out in these buildings or in the volume of this activity;
• Costs that are clearly disproportionate to the expected benefits in terms of final energy consumption.

It is possible to request these adjustments to the targets up to 30 September 2026 for the 2030 targets, by submitting a technical and/or financial file to justify them on OPERAT.

These objectives apply to all buildings, parts of buildings, or groups of buildings whose site includes public or private sector tertiary activities, and whose cumulative floor area related to this activity is greater than 1,000 sq.m.

The areas for action to achieve the reduction targets include:

• energy performance of buildings;
• installation of energy-efficient equipment and systems for monitoring and actively managing such equipment;
• equipment operating procedures;
• adapting premises for efficient energy use and occupant behaviour.

As of 2022 and before 30 September of each year, landlords or tenants (based on their respective obligations under the lease agreements) must provide their consumption data and any technical files – if needed - for the premises concerned on the OPERAT platform provided by ADEME (French Environment and Energy Management Agency).

The OPERAT platform automatically calculates, on an annual basis, final energy consumption, targeted consumption objectives, and greenhouse gas emissions for the operators covered by this Decree.

Residential leases:

Green lease provisions are not usually included in residential leases. However, EPC ratings are becoming essential for the leasing of residential premises. Please refer to question 1 for more details.

So far, in France, there is no general market practice according to which banks and financing institutions require a borrower to insert specific green lease provisions in their leases when granting loans to borrowers. 

As such, when granting loan for financing or refinancing asset purchase or asset construction, banks do not tend to flag any lack of green provisions in the leases to be entered into with respect to the financed asset.

Where a loan is specified as a “green” loan, banks will generally require the financed asset to be compliant with environmental criteria. For such financing, banks require  specific reporting  provisions in the loans relating to the impact of the green loan proceeds.

Finally, it is likely that banks will increasingly require borrowers to comply with environmental criteria, particularly as banks themselves must demonstrate a certain level of extra-financial performance. In this respect, lenders will seek to label their lending as "sustainable" (eg. Green Loan Principles), even if the absence of a harmonised standard for defining green finance in respect of ESG criteria prevents real control by lenders.

Reference is made to the description of Green Appendix and Tertiary Decree in question 3.

Green Appendix:

In general,  the commitments made by the parties in the Green Appendix are best efforts commitment and are therefore not binding. Furthermore, no specific sanctions are provided for in the event of failure to provide a Green Appendix. 

Although no specific sanctions are provided for in this respect, the tenant could, on the basis of contractual liability - and in particular Article 1112-1 of the French Civil Code (duty to inform) applicable to leases entered into after 1st October 2016, call the landlord’s liability into question, subject however to proving prejudice, which seems very difficult, if not impossible, to establish, as the content of the environmental appendix is not binding.

Tertiary Decree:

Landlord and tenant’s obligations are defined with respect to the objectives specified by the Tertiary Decree (described in question 2 above).

The parties are free to determine who will be responsible for submitting the annual consumption of the leased premised to the OPERAT platform. In practice, submission of data consumptions is usually carried out by new services providers who offer to collect and transmit the data to the OPERAT platform.

Failure to transmit data to the OPERAT platform can result in sanctions (formal notice to comply with the obligations within 3 months; failing this: name & shame sanction).

Non-compliance with reduction targets of final energy consumption may also result in sanctions (formal notice to draw up a programme of action that complies with the obligations and a commitment to comply with it (within 6 months); failing this: further formal notice to draw up individual actions programmes – one for the landlord and possibly one for the tenant – within 3 months ; failing this: name & shame sanction and possible administrative fine).

The certification of buildings is widespread in France. Indeed, demand for building certifications is steadily growing given the importance of ESG for both investors and occupiers.

For investors, obtaining one or more certifications is increasingly a criterion when acquiring buildings. Certified buildings indeed show lower vacancy rates. In addition, they usually show higher rents.

For occupiers, certified buildings are generally the sign that they will benefit from reduced energy expenses and a higher quality of work environment.

Certifications are based on a voluntary approach and are not regulated.

In practice, leases usually provide that the tenant must assist the landlord in the certification process (e.g. by allowing access to the premises for the certification assessment, by maintaining certain good practices…) and that the tenant must ensure that the certifications are kept during the term of the lease. Leases can also provide that the tenant is responsible for the costs to obtain and maintain the certifications, as landlords often argue that the tenants are the main beneficiary of the certifications. On the other hand, tenants usually argue that certifications benefit the owners of the properties since they increase their value. This topic is usually discussed between the parties during the lease negotiation process.

In France, legal requirements exist for buildings to be equipped with renewable energy production systems. These requirements are being strengthened over time. At present, they apply to certain commercial buildings (notably shops and offices), based on different floor area thresholds (500 sq.m or 1,000 sq.m), during construction, major renovation or extension operations. Requirements will be reinforced (i) on January 1, 2025, to extend the categories of buildings covered and align the floor area thresholds with 500 sq.m, then (ii) on January 1, 2028, to apply to certain existing tertiary buildings.

However, these are alternative obligations. The owner of a building subject to these obligations may therefore choose to install a roof greening system, or a system that achieves the same result as a renewable energy production system or a greening-insulation system.

The current minimum roof coverage requirement is 30%. This will be increased to 40% from July 1, 2026, and to 50% from July 1, 2027.

Full or partial exemptions may be requested (i) if technical, safety, architectural or heritage constraints prevent compliance with the obligation, particularly if the installation is likely to aggravate a risk or presents an insurmountable technical difficulty, or (ii) if the work required to meet the obligation cannot be carried out under economically acceptable conditions.

Failure to meet the obligations may result in administrative and/or criminal penalties.

It should also be noted that legal obligations to install renewable energy production processes are also likely to apply to certain parking areas: outdoor parking lots of over 500 sq. m. associated with buildings or parts of buildings themselves subject to the obligation; new outdoor parking lots open to the public of over 500 sq. m.; outdoor parking lots of over 1,500 sq. m. existing on July 1, 2023, or for which the application for planning permission has been submitted on or after March 10, 2023.

While there is no legal obligation to specifically address this issue in commercial leases, it is still advisable to deal with the subject contractually, insofar as (i) different contractual arrangements may apply to the operation of photovoltaic panels installed on the building and/or (ii) the subject may raise questions regarding the apportionment of rental charges.

Connections into the grid: There is no obligation to connect to the grid. However, it will be necessary if the electricity producer wishes to resell all or part of the electricity produced. In this case, a connection request must be sent to the public electricity network operator, following which the operator will forward a technical and financial proposal. If this proposal is accepted by the electricity producer, a contractual arrangement will be set up between the operator and the electricity producer. This arrangement varies according to whether the network is high or low voltage, and in the latter case, according to the power of the installation (i.e. below or above 36KVA), but a standard arrangement includes (i) a connection agreement, (ii) an operating agreement and (iii) an access contract. The connection deadline, from the time the power producer accepts the connection agreement, depends on the power output of the plant:

• Facilities with a power rating of 3KVA or less: 1 month;
• Facilities with a power rating greater than 3KVA: 12 months maximum.

Biodiversity concerns have become central to building projects in recent years.

As required by European Union law, it is forbidden to destroy protected species or their habitat.

However, by exception, a special exemption must be obtained, known as a "protected species exemption". This derogation can only be granted if 3 conditions are met: (i) there is no satisfactory alternative solution, (ii) the project does not harm the conservation, in a favourable conservation status, of the populations of the species concerned in their natural range and (iii) the project meets one of the 5 hypotheses listed exhaustively in Article L.411-2 of the French Environment Code and in particular the fact that the project meets, by its nature and its economic and social interests, an “imperative reason of overriding public interest”.

The protected species exemption has become one of the main contentious risks likely to lead to the cancellation of the authorisations required for the project. Note that the destruction of protected species is punishable by criminal and administrative penalties.

Soil artificialisation is a recent concern, which was incorporated into the Town Planning Code and the General Code of Local Authorities with the Climate and Resilience law dated 22, August 2021. This law set a target of zero net soil artificialisation (“ZAN”) by 2050, that must be integrated into local planning documents. In the coming years, this ZAN objective will necessarily have an impact on the new construction sector, as the building authorization cannot be granted if the project does not comply with the local planning documents. Therefore, construction sector will have to promote the densification of already urbanised areas or the exploitation of vacant premises and buildings. Note that the French Government has selected around one hundred projects of major national and European interest (notably industrial projects) which will not be included in the accounting of the local ZAN objective.