The data centre industry continues to grow rapidly, which is unsurprising given the worldwide increase in internet demand, and the huge amount of digital data stored by corporations and individuals.
You only need to look at your own personal digital data usage to highlight this increase in demand – it probably was not too long ago that you received a notification on one of your devices that you had reached the limit of your online cloud storage. Whether this be downloaded movies, or hundreds of pictures of cats, the fact is we are all using and processing more data, which means we need more data storage, which means we need more data centres.
The environmental challenge
At the same time, ESG continues to be at the forefront of the agenda for many corporations. Many companies either already have set, or are in the process of setting, aspirational ESG targets, which may include deadlines for reaching carbon neutrality, initiatives to support local communities and implementing strong governance and ethical practices.
Unfortunately, with particular focus on the E of ESG, data centres consume huge amounts of energy, which does not neatly fit with many corporations’ ESG ambitions. With that in mind, we have seen a push to try to improve the ESG credentials of data centres.
For example, one very small data centre is being used to heat a local authority swimming pool in Devon and, in some instances, waste heat from data centres is being used to heat homes. However, the ability to recycle waste heat for heating homes can be very difficult to retrofit into an existing data centre, and will often not be cost effective or practicable.
Nevertheless, there are many other ways that data centre investors can look to ensure that their assets operate responsibly, including the adoption of “responsible” lease clauses.
Traditional green lease clauses typically do not go far enough to encourage energy efficiency or the collaborative approach to the improvement of ESG credentials that may be required by some data centre investors, operators and customers, meaning that a more bespoke approach may well be required.
Here we consider 10 ways in which responsible data centre lease clauses can help further the ESG agendas of data centre investors, operators and customers.
1. ‘Responsible’ best practice
The lease can include an agreed, aligned approach between the operator and customer on best practice for sustainability and social/governance matters during the term.
Some parties may want to include mechanisms to enforce best practice by all parties. However, the ability to enforce needs to be balanced with the need for flexibility and leniency. An overly rigid framework is unlikely to assist either party, and could have a detrimental impact for a data centre owner on rent review.
2. Certifications
Transparency is key and investors and customers will want to see data centre operators meeting their commitment to green initiatives. Data centre leases frequently include obligations on operators to obtain and retain certifications such as BREEAM, LEED (Leadership in Energy and Environmental Design), ISO 50001 and 14001 energy management standards and the SS 564 certification for green data centres.
3. Data sharing
Data centre leases can also contain effective data sharing requirements to ensure that energy is being efficiently used by both the operator and customer. In multi-occupied data centres, each customer will usually be required to install additional sub-meters to measure and improve energy usage as the use of the data centre changes over time. This can help customers and operators track their data usage for reporting purposes.
As well as sharing data, the operator may want a right within the lease to see the customer’s reporting on energy use and efficiency in advance, to ensure that their own reporting takes the same approach to the underlying customer’s data.
Alternatively, the operator may want to stipulate the manner in which the customer’s data is reported, particularly in a multi-let data centre, in order to ensure that it is readily able to collate and report on the collective data from its customers.
4. Cost sharing
Operators and customers alike will be keen to ensure the lease is clear on who pays for energy improvement works. This may mean incorporating pass-through clauses, which push the capital cost of any energy efficiency improvement works to the customer, or an agreement to share costs at the outset together with mechanisms to incentivise energy and water efficiency projects between the operator and the customer.
5. Alterations
As for other types of commercial lease, data centre leases should also contain mutual obligations requiring any improvements to the building to meet a minimum design standard.
On the flip side, customers will be keen to ensure they do not end up paying twice through increased rent on rent review as a result of these improvements, so customers will be looking to ensure that energy efficiency works are disregarded in rent review clauses.
6. Retro-commissioning
Operators may be required by customers to carry out retro-commissioning studies to analyse and, if cost effective, implement continuous innovation to improve energy and water efficiency. Operators may want to make it so that customers are at least partly responsible for meeting the costs of such studies.
7. Purchase of renewables
Either the operator or the data centre customer may have committed to purchasing energy only from renewable sources as part of their published ESG strategy.
If so, this will need to be documented in the lease, giving the operator/customer the ability to procure on-site and off-site cost-effective renewable energy from local wind or solar farms.
With many data centres seeking to use recycled water for cooling, the lease could contain a right, or even an obligation, to do so.
8. Sale or re-use of surplus heat
Several large tech companies have committed to recycling the surplus heat produced as a by-product of their data centres for use to heat homes, schools or hospitals by connecting to local networks.
If this is a policy customers are keen to explore, or that they wish to require an operator to comply with, the lease will need to provide for this.
9. The S of ESG
As well as the obvious environmental factors, in order to satisfy both the operator and the customer’s wider societal commitments, the lease may also contain obligations on both parties to measure social risks, such as employment and work conditions, anti-discrimination procedures, health and safety practices and anti-bribery and anti-corruption policies.
In addition, some customers may want to insist on limits and restrictions on the type of other customers who occupy space in the data centre. This may require there to be something akin to a tenant-mix policy in place which the customer is entitled to rely on.
10. The G of ESG
Data centres will often process huge amounts of sensitive and confidential data. As a result, customers and operators will want to ensure that there are sufficient security measures in place, such as restrictions on access.
This is something that may be set out in a site regulations document accompanying the lease, which can be updated as and when required.
More to come
With ESG becoming a key factor for investors, as well as crucial to operators’ and customers’ reporting obligations, these sorts of clauses will become increasingly common – and important – in data centre leases.
No doubt the list of ESG-related clauses which we will start to see in data centre leases will continue to grow, as ESG continues to grow in prominence.
Next steps
There is a myriad of practical issues to look out for when considering entering into or investing in data centres leases in the UK in 2024. If you are looking to bring forward or invest in data centre developments we at Hogan Lovells would be delighted to help you to achieve this. Please reach out to any of the Contacts listed here and we would be delighted to help you.
An earlier version of this article appeared in EGi on 9 March 2024.
Authored by Benjamin Willis and Clare King.
