Environment and social issues have more prominent role to play in how landlords and tenants resolve disputes - Alison Gow

ESG (environmental, social and governance) issues are increasingly lying at the heart of investment decisions, commercial contracts and corporate culture. With property accounting for nearly 50 per cent of all carbon emissions, ESG has an even more prominent role to play within the real estate sector where these factors are having a direct effect on how landlords and tenants respond to and resolve disputes.

Although there is undoubtedly a place for conventional litigation, alternative dispute resolution (ADR) methods, which include mediation and arbitration, could become an increasingly important means of settling ESG-related conflicts. This offers a typically a more collaborative and less confrontational process that aligns with the ESG principles of working together for the greater good.

The rising focus on ESG means that landlords and tenants might need to invest more in their mutual relationships to meet green targets and social commitments within a building – and across the wider community within a development.

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New leases are also increasingly likely to contain clauses that set out the landlord and tenant’s respective ESG commitments and the implications of failing to meet these. This will cover specific areas including what can be defined as “nuisance” where issues arise from competing demands on the use of space by tenants and other occupiers, particularly in developments which combine leisure, residential and business uses.

Alison Gow is a Partner at CMS

There is also scope for more service charge disputes over what can be considered “fair and reasonable”, with potential for landlords to introduce various ESG-related benefits to occupiers of a development. There will need to be considerations whether business tenants should bear a greater cost burden for any well-being benefits within a development.

Both landlords and tenants will benefit from having reciprocal and tangible ESG targets in place to ensure they jointly adhere to their commitments and avoid greenwashing claims.

When disputes do arise over ESG matters, mediation and arbitration are potentially useful options to consider as they engage both parties in a facilitated dialogue. This does, however, involve a formal, quasi-court process which will lead to a binding agreement.

Mediation is a particularly collaborative, discussion-focused, and often effective means of resolving such disputes. A typical mediation will see the parties engage in a discussion with each other, supported by a mediator whose role will vary on a case-by-case basis but is always focused on helping parties move discussions forward. In some cases, a mediator can serve as a subject matter expert, playing a more active role in negotiations to help parties to identify strengths and weaknesses in their positions. The mediator can also advise on how a dispute might play out in court and guide parties towards a potential resolution.

Mediation can often deliver creative solutions as it enables the parties involved, rather than the court, to set their own agenda and agree a resolution. It’s also more cost effective and quicker than court proceedings and is typically a better method in retaining or restoring good working relationships between the two parties in dispute. This is always a significant benefit, especially for those who are involved in longer lease relationships.

Unlike traditional litigation, both mediation and arbitration are also strictly private and confidential which may be particularly important to both property owners and occupiers who are navigating around difficult contractual relationships.

These factors matter because reputational considerations around ESG can be particularly sensitive. The absence of cases dealing with these issues and the softer, nuanced nature of many current ESG policies makes the outcomes of litigious actions much less certain.

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At a time where we’re experiencing an increasingly tangible link between health and social isolation, the real estate sector has the potential to improve relationships in communities and within workplaces.

Meanwhile, ESG issues are becoming increasingly important for landlords and are impacting on potential tenants and investors. Millennials and Gen Z are also much more aligned to this agenda with ESG issues far more likely to be in the forefront of this generation as they enter the workforce and develop their careers.

The ESG landscape will therefore change the nature of real estate disputes and will require careful, collaborative action to ensure these can be effectively resolved.

Alison Gow is a Partner at CMS

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