ESG in Real Estate - Green Leases expert guide in Germany

Yes, EPCs are mandatory for all lettings or sales of residential or commercial properties. EPCs are also mandatory for all new buildings, buildings undergoing major renovations, and buildings where more than 250 sqm is used by a public body if they are heavily frequented by the public and also in the case of buildings with more than 500 sqm that are heavily frequented by the public, even if they are not used by public bodies. However, it is not required in certain exceptional cases. As of today, no minimum performance is required. 

The relevant legislation focuses primarily on new buildings and certain renovations whereby the implementation of specific modernisation measures (e.g. modernisation of heating, installation of smart meters) is increasingly being imposed by law as well for existing properties, irrespective of any renovations planned by the owner of the building. Also, the focus lays on the environmental aspect of ESG. The main laws to be observed in this regard are the following: 

• Act on energy conservation and the utilisation of renewable energies for heating and cooling in buildings (Gebäudeenergiegesetz (GEG))
• Act on the development of a building-integrated charging and cable infrastructure for electromobility (Gebäude-Elektromobilitätsinfrastruktur-Gesetz (GEIG))
• Act on the sharing of carbon dioxide costs (Kohlendioxidkostenaufteilungsgesetz (CO2KostAufG))
• Law for the expansion of renewable energies (Erneuerbare-Energien-Gesetz (EEG))
• Act on metering point operation and data communication in smart energy networks (Messstellenbetriebsgesetz (MsbG))
• Act to increase energy efficiency in Germany (Energieeffizienzgesetz (EnEfG))
• Law on corporate due diligence to prevent human rights violations in supply chains (Lieferkettensorgfaltspflichtengesetz (LkSG)) 

Green leases have gained some popularity within the German 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 German real estate market tends to use the recommendations for the drafting of green lease agreements issued by the 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 due to the mandatory provisions in the German Civil Code in favour of residential tenants, which severely restrict applicability in residential leases. Similarly, the applicability in the scope of application of general terms and conditions is influenced in both residential and commercial leases and is also more restricted here in the B2C area and thus primarily in residential leases, which also promotes cautious use in residential leases. 

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, DGNB). 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 German real estate market tends to use the recommendations issued by the 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 German 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 and DGNB are generally recognized in the German real estate market and in most cases also demanded by commercial tenants and investors whereby tenants and investors are also generally more likely to ask for certification of the building when it is a new building. 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. 

This is contingent on the specific setup, such as e.g. the generation capacity and potential local requirements. 

1. Regulatory provisions

The expansion of rooftop PV is being significantly pushed by the Federal Government and therefore building and regulatory law is constantly being reshaped in this regard. A building permit is generally not required for rooftop PV installations. However, for new commercial properties, it is mandatory in most federal states to install PV systems. The specific details of this obligation are governed by state law. 

Subject to certain exceptions, the requirements for financial support scheme can be summarized as follows: 

1. PV plants with an output of less than 100 kW (and, under certain circumstances, 200 kW) are eligible for a feed-in remuneration.
2. PV plants with a capacity of up to 1 MW are eligible for financial support in the form a market premium (i.e. a type of one-sided contract-for-difference).
3. PV plants with a capacity of more than 1 MW are eligible to participate in tender auctions, the award resulting of which will determine the amount of financial support. 

If the PV plant is located directly on, or adjacent to the building where the produced electricity is consumed, a tenancy electricity surcharge scheme may apply to the benefit of the PV plant operator. The amount of financial support is determined by statutory law.

Further regulatory requirements apply. 

2. Contractual provisions:

The electricity generated by the rooftop PV plant can be marketed outside any financial support scheme described above, i.e. by way of a direct marketing agreement or a merchant PPA. Finally, the generated electricity can be consumed on site in order to meet the electricity demand of the building on which the PV plant is installed. 

If the rooftop PV plant is not operated by the building owner, a lease agreement as well as a respective in rem right (i.e. easement) are typically required. Key aspects to be regulated beyond the right to use usually include aspects such as the risk and cost allocation regarding roof renovation, installation and dismantling of the PV plant, and structural integrity checks. The contract duration is typically set at twenty years, with an option for extension. 

Given the multitude of involved stakeholders – building owner, plant operator and/or owner, grid operator, electricity off-taker or consumers, EPC contractor, and O&M provider – PV projects require a complex grid of contractual relationships. This intricate contractual framework may establish significant interface risks, which need to be mitigated through careful contract design. 

The issues of soil artificialization and biodiversity in new builds and refurbishment projects are dealt with at different levels in the German legal system. German building and environmental law is characterized by the fact that there is a general overarching zoning level at which the public bodies, such as the federal states, regional bodies and municipalities, set general requirements for the permissibility of projects and development of the land which are binding for the lower planning levels. The most important instrument for the real estate sector is the development plan (Bebauungsplan) which is adopted by the municipalities and provides for binding requirements for the use of real estates located within its borders. Namely in setting up development plans, soil artificialization and biodiversity are already taken into account to the extent that a wide range of environmental requirements have to be considered as part of the planning process and these have to be mapped as part of a separate environmental assessment, in which species protection, the need for further sealing of land (assessment of alternatives), landscape protection, etc. are taken into account. The result of this assessment is usually that when development plans are drawn up, degradations in the ecosystem must be compensated for by developing compensation areas elsewhere and taking other appropriate measures to avoid or compensate detrimental impacts on nature, landscape, and species. The development plans provide for specific requirements related to minimize soil artificialization or improve biodiversity, such as provisions as to what percentage of the area of a property may be built on (floor space index), or on binding requirements regarding green roofs, green façades and/or other greening measures on and around the project. 

If, in connection with a planning procedure, there is already an investor interested in a specific development, the zoning generally is accompanied by an urban development agreement between the project developer and the municipality. Such agreement typically includes specific project-related provisions on greening and biodiversity which must be implemented by the investor within certain time-limits. 

The second relevant level of public law requirements for projects is the specific authorization process. There are various categories of permit procedures for the different types of projects, such as project planning approvals (Planfeststellung) for infrastructure projects, immission control permits (Immissionsschutzrechtliche Genehmigung) for industrial and other emitting technical installations or building permits (Baugenehmigung) for other buildings and similar structures. Each of these types of permits is granted in specific administrative procedures. The assessment of the permissibility of individual projects must also take into account a wide range of environmental law requirements that have a direct or indirect impact on land sealing and biodiversity. For certain types of projects, so-called environmental impact assessments (“UVP”) must be carried out which also cover soil artificialization and biodiversity. The above-mentioned zoning law requirements must also be observed in such individual projects. 

Generally spoken, there is no uniform legislation in which biodiversity requirements are consistently and coherently regulated in German law, but these requirements arise from a multitude of individual regulations that are incorporated into the planning and permitting procedures. 

These regulations are primarily enforced by the fact that a project only gets permission and can therefore be realized if the various requirements are met. In addition, the requirements may be enforced both neighbors and other affected persons, as well as nature conservation associations recognized under the Environmental Appeals Act, which are entitled to take legal action against development plans as well as building permits and other project approvals. These threats are a considerable incentive to comply with the applicable legal requirements. Furthermore, the individual laws include provisions on administrative offences and the right of supervising authorities to issue and enforce administrative orders.