Environment, Social and Governance (ESG) is a topic that is increasingly in the spotlight and is rapidly evolving. It can be a difficult and frustrating topic for developers to grapple with, as many themes are still conceptual and abstract and can be challenging to translate into tangible outcomes.

In terms of environmental initiatives, developers are increasingly striving to create projects with a sustainability focus. A greater number of purchasers and tenants are searching for products that are friendly to the environment, cheaper to run and more sustainable. A threshold issue for developers is often how to connect these two drivers to generate a meaningful and practical outcome rather than more conceptual and abstract theory and concepts.

One area where there is a framework in development projects to deliver tangible outcomes in sustainability is rating tools. From the National Australian Built Environmental Rating System (NABERS) to Nationwide House Energy Rating Scheme (NatHERS) to Building Energy Efficiency Certificate (BEEC) and beyond, these rating tools are evolving quickly, and we have seen a number of legal issues present in development projects we work on. This article discusses why it is important for developers to understand what these rating tools mean, when they apply, why they should be used and what the consequences are for getting it wrong.

Rating tool summary

It is important to understand what each rating tool is and when they are used before considering the legal issues that arise in their application. See the summary table below.

Rating tool	What is it?	When to use it?	Comments
NatHERS	Energy efficiency rating – based on design (compulsory) This includes predicting how much energy will be used to heat and cool the home by considering the direction of the building, building materials and climate	Residential – new dwelling only assesses new buildings and major renovations from mid-2023, will also assess existing dwellings	currently, all new Australian houses and major renovations must have a rating of 6. Under the 2022 National Construction Code (NCC), commencing in May 2023, this will be increased to a 7-star rating limited to energy efficiency and residential builds will soon assess the design and existing building
NABERS	Environmental performance rating – based on actual operation, not design NABERS is designed to assess the environmental performance of an existing building, including energy, water, indoor environment quality and waste performance	Non-Residential - existing buildings used for commercial buildings, including office spaces, shopping centres, common spaces within apartments, public hospitals, hotels, data centres and warehouses only used for existing buildings compulsory for all office spaces of 1000 square metres or more compulsory in order to obtain a BEEC	is required for BEEC purposes measures actual performance, not design compliments/crosses over Green Star ‘Design & As Built’ doesn’t assess homes, townhouses and units
BEEC	Energy efficiency rating – based on actual operation – companion to NABERS (compulsory) A Building Energy Efficiency Certificate (BEEC) measures the energy efficiency of a building and requires a NABERS rating and Tenancy Lighting Assessment	Office – existing buildings the Building Energy Efficiency Disclosure Act 2010 (Cth) requires certificates for the sale, lease and sublease of most office space over 1000 square metres used for existing buildings	compliments NABERS
Green Star	Energy efficiency and environmental performance rating – can include design and actual operation (voluntary) A voluntary rating tool used for assessing the design, interior fit, construction and operation of buildings and community projects. Assesses a number of categories, including energy use, transport, water, materials, management, indoor environment quality, ecology and land use	Residential and non-residential – new and existing buildings Available for all building types, with the exception of single homes that have not been built by a volume home builder. There are a range of different rating tools, and each tool has a different function Buildings and Design & As Built – design and construction of a building Interiors – fit out Performance – performance of existing buildings Communities – design and plans for a precinct scale development	widest assessment assesses both designs and existing buildings compliments/crosses over with NABERS competes with compulsory rating tools

Key legal issues

1. Are there any mandatory disclosure requirements for purchasers or tenants?

The mandatory disclosure requirements imposed on property owners and landlords in connection with rating tool information are as follows:

1. commercial – mandatory provision of a BEEC before a commercial office space goes on the market for sale or lease, subject to some exceptions
2. residential – currently no mandatory statutory disclosure obligations on owners selling residential dwellings ‘off-the-plan’, established homes or leasing dwellings (but see our comments below on ‘material facts’ in a sale)
3. industrial – currently no mandatory disclosure obligations on owners selling or leasing industrial spaces (again, see our comments below on ‘material facts’)

Commercial

In relation to commercial assets, the Commercial Building Disclosure Program (CBD Program) and the Building Energy Efficiency Disclosure Act 2010 (Cth) (BEED Act) require most owners of office space of 1000 square metres or more to:

• obtain a BEEC before the office space goes on the market for sale, lease or sub-lease, and
• include the builder's NABERS Energy for offices star rating (obtained from the BEEC) in any advertising material for the office space.

There are some exceptions to the disclosure requirements, including:

• new buildings where a certificate of occupancy (or equivalent) has either not yet been issued or was issued less than two years earlier
• buildings that have undergone major refurbishment for which a certificate of occupancy (or equivalent) was issued less than two years earlier
• strata-titled buildings
• mixed-use buildings where total office space comprises less than 75 per cent of the building by net lettable area (or gross lettable area if a net lettable area is unavailable)

Civil penalties apply for non-compliance, currently being $184,920 for corporations and $64,722 for individuals for each non-compliance.

The owner of a commercial building affected by the disclosure requirement must provide a current, valid BEEC to potential buyers and tenants free of charge, as early as possible in the transaction process and when requested by a buyer or tenant.

Material facts

When selling property in Victoria, the Sale of Land Act 1962 (Vic) was recently amended to make it an offence for property owners to knowingly conceal any ‘material facts’ with the intention of inducing any person to buy any land. The concept of ‘material facts’ is so broad that it has its own set of accompanying guidelines around what constitutes a ‘material fact’.

Those guidelines state that ‘A material fact is a fact that would be important to a potential purchaser in deciding whether or not to buy any land’. Examples in the guidelines refer to prior tests or investigations for contamination, structural defects in any building (including combustible cladding and asbestos) along with many other examples.

For sales of assets where there is no mandatory disclosure for rating tool information, consideration needs to be given as to what information should be disclosed, if any, if a rating has been obtained, and particularly if purchasers ask. For example, if there have been representations made around a Green Star rating as part of the sale process (see below on representations) then there may need to be some information in support of that representation to explain what that means in practice for that particular asset.

2. Representation and greenwashing

Developers are becoming increasingly aware of the need to deliver products that are cheaper to run, friendly to the environment and more sustainable. It may be (although not always) that purchasers and tenants are prepared to pay a premium for those products.

Developers need to be mindful in their approach to marketing any ratings obtained or to be obtained and what that may mean in terms of any benefits so that they are not misleading or incorrect (even if it is unintentional). False marketing claims about the ESG characteristics of products (often referred to as ‘greenwashing’) have become more and more prevalent over recent times, particularly as sustainability and environmental impacts continue to grow in importance for consumers and businesses alike.

In terms of property development assets and rating tools, there are two potential areas to address:

• representations around the material and processes used to construct an asset, and
• representations around the operational impact on an asset and the benefits to the purchaser or tenant.

For example, as we move towards the potential ‘electrification of everything’, developers need to be careful in making representations around savings to electricity bills and/or outgoings (in a leasing context), and ensure that if there are any such representations made there is data and material on which to base those representations.

If a developer is found to have engaged in conduct that is misleading or deceptive or has made a false or misleading representation, there are a number of remedies available to purchasers including having the relevant contract declared void in whole or in part, having the contract or arrangement varied, seeking compensation for loss or damage, pecuniary penalties and/or a refund.

However, since October 2022, the ACCC has entered into the foray and been conducting checks of over 200 company websites to identify misleading claims concerning the green credentials of products. Whilst the target has been on sectors such as household appliances and goods, food and beverages, clothing and cosmetics, developers’ products are not immune from scrutiny. For more on the ACCC’s efforts, read our recent articles ‘Greenwashing — it's not sustainable’ and ‘Greenwashing — Part 2’.

3. Pass through to tenants and purchasers

In a corporate regulatory environment that has increased ESG requirements, along with the requirements and expectations of investors, when leasing assets, developers may need to pass through certain obligations to tenants.

For example, in industrial logistics leasing those obligations may include provisions in an agreement for lease or lease requiring the tenant to assist the developer with certain initiatives to achieve a certain Green Star rating. That builds upon the reasonably well worn concept of ‘green leases’, which typically strive to pass on to the tenant obligations in respect of items such as:

• target environmental performance standards – for instance, a particular Green Star rating for the tenancy, including a requirement to purchase green power
• metering and data reporting requirements – setting sufficient metering requirements and an appropriate data reporting regime to assist tenants and landlords to have an understanding of energy usage and cost
• environmental management plan – a requirement for tenants to create and maintain an environmental management plan which contains, among other things, strategies for managing energy consumption and other sustainability performances
• building management committee – constituting representatives of both the landlord and the tenant, the rationale behind this committee is to keep each party accountable and to ensure the green lease provisions are being implemented and complied with.

There are currently no express statutory obligations on tenants to comply with property owners’ requirements in connection with rating tool related matters. It can therefore be challenging for property owners to pass these obligations on to occupiers and/or purchasers.

In deals with an institutional tenant that is equally minded to achieve sustainability outcomes, or in deals where the landlord holds all the cards in terms of negotiation leverage, there may not be an issue with any such pass-through requirements. However, we still see that there is often an issue with private tenants not wanting to fully assist with rating tool initiatives – typically around the cost to the tenant of implementing those initiatives.

In our experience, those negotiations eventually get to an outcome that the landlord is satisfied with, but if not managed correctly, those negotiations can be protracted and add time and cost to a deal. We see the best results where a developer:

• prepares a package of relevant data and material demonstrating actual or proposed benefits and savings to tenants (noting the representation considerations referred to above); and
• clearly, drafts what each party will be required to do, rather than attaching schedules that are vague in terms of allocation of responsibility (which can also cause issues after documents have been exchanged when the relevant requirement might be disputed if not clear).

It is also worth noting that developers who are seeking to enshrine sustainability practices in built form projects with owners corporations should carefully consider owners corporation's rules and structures at the outset of a project. Those rules, requirements (and any costs) are often overlooked at the outset of a project. If they can be identified and then be disclosed to purchasers in sale documentation, that is preferable, rather than made later after sales have been made which could result in arguments around misrepresentation over changes to owners' corporation rules and requirements.

Key takeaways

As ESG requirements proliferate, so are rating tools, both in terms of their scope and their use by developers. As a result, it is important for developers to understand disclosure requirements, representation risk and pass through obligations to avoid fines, disputes or deals falling over.

Where rating tools go from here will be interesting. Given that some rating tools are starting to overlap with others (Green Star, for example) or upgraded (the minimum 6 star NatHERS for new homes being increased to 7-star) there can be confusion for purchasers and tenants over what green initiatives are being delivered and what that means in practice. That means developers need to spend more time than ever in clearly articulating what is being delivered.

If you have any queries about rating tools, ESG or any of the other topics discussed in this article, feel free to reach out to our Development Team.