The Landlord & Tenant Split Incentive Challenge

[John Flexen]

There is no doubt that real estate is entering a challenging period of transition to net zero, where we need to re-engineer the way we value, finance, design, construct, refurbish, and operate our buildings. Failure to respond to this challenge will result in buildings that do not meet tightening government regulations, occupier demand for sustainable, comfortable and healthy workplaces and owners seeking low carbon investments. 

80% of buildings with us today are estimated to still be in use in 2050 and in most cases extending the lifespan of existing buildings offers a lower carbon pathway than new build. This presents a great opportunity to transition most of the UK office stock to deliver sustainable, comfortable and healthy workplaces for occupiers and superior returns for owners. One of the barriers facing the industry is the landlord and tenant split incentive challenge, which deters investment in energy saving interventions as the landlord typically pays the cost, but the tenant accrues the savings that result from reduced energy use. Where these challenges exist, they need to be addressed through a collaborative approach taking into account all the factors impacting landlord and tenant to arrive at a ‘win win’ solution.