What are the Climate Change Implications for Commercial Property Transactions?

In the commercial real estate sector, climate change has fast climbed the list of priorities. Investors and regulators are introducing more stringent rules, while employees and tenants demand action on the development of sustainable buildings, says Caroline Robinson, of property data experts Search Acumen.

It’s no secret that extreme weather conditions are on the rise. The commercial property sector is taking action by collecting more data to better understand climate change impacts, decarbonise real estate portfolios and advising clients on how to best manage and mitigate the risks.

However, as we know, the definitions and processes around measuring and managing climate change are still emerging and being refined on an ongoing basis. Navigating the complexity requires all sectors to clearly outline roles and responsibilities so that the risks can be adequately addressed and managed upfront.

To further examine the role of commercial real estate lawyers in helping clients understand the implications of climate change, Search Acumen hosted a discussion with leading commercial lawyers in collaboration with long-term partner Groundsure. The event was chaired by Stephen Sykes, Environmental Lawyer and Consultant, and focused on how the property legal sector can rise to the climate challenge and safeguard clients.

Lawyers play an important role in highlighting environmental issues at the start of commercial property transactions, helping clients determine the best next steps early on in the process, saving time and resources later on.

But responsibility for raising – and especially explaining – the implications of environmental concerns does not rest solely on lawyers’ shoulders. In particular, Katherine Crowley, Legal Director and Real Estate Practice Development Manager, was adamant that environmental reports should be aimed at the correct professionals, and not lawyers, so that the implications for property valuations can be accurately assessed.

The property transaction process involves a range of professionals including lenders, valuers, insurers and surveyors, who all have a responsibility to signpost risks to clients. For example, surveyors currently look at environmental factors as part of the EPC rating. Michelle Radcliffe, Senior Associate in the Insurance and Reinsurance Group at CMS, highlighted that PI insurers can take issue with lawyers and others acting as environmental advisors without the necessary qualifications, using this as a leverage to require lawyers to gain a better understanding of risk. This demonstrates how insurance is an important and underappreciated market driver in taking environmental matters more seriously, and is a key example of how external influences are impacting how commercial lawyers handle environmental risks with clients.

While lawyers play a crucial role in terms of sourcing and highlighting environmental risks upfront, it is important that the full extent of these issues are explained by the right professional, so as not to cause unnecessary delays to transactions. Lender pressure is not yet being felt across the industry in this regard, in part because the risk is being screened at an early stage by lenders, which is pre-mortgage approval, but increasingly, there will be a need for specific environmental expertise to fully interpret data and explain the risks to clients at an earlier stage.

Ultimately, we need to move to a more joined-up approach to identify, explain and manage environmental issues for clients. This matter is only going to grow in importance, and it will have a significant impact on real estate valuations. By knocking down silos between all stakeholders and finding an agreed approach, the real estate sector can better advise and manage the longer terms impacts of climate change for the benefit of all.


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