Smart buildings need smart contracts: The PropTech risks property owners cannot ignore

A smart building can reduce costs, improve workplace performance and provide valuable environmental data. Occupiers should nevertheless look beyond the technology specification and establish what they can access, what they must pay and what happens when a critical system fails.

From premium feature to market expectation

Technology is changing what businesses expect from their premises. Energy monitoring, smart controls and automated systems can help occupiers manage consumption and reduce operating costs. Occupancy analytics can show how space is being used, informing decisions about layouts, collaboration and future property needs.

Integrated systems may also improve comfort, accessibility and convenience for employees or occupiers. At the same time, access to reliable building-performance data can support environmental reporting, carbon-reduction targets and wider ESG commitments.

These benefits can make a smart building an attractive proposition. However, they also create new dependencies. 

Before signing a lease, an occupier should therefore understand not only what the technology is designed to do, but who controls it and what rights the occupier has if it does not perform as expected.

Control matters when systems are business-critical

An occupier may depend on building technology for access, heating, cooling, lighting and other services that are essential to daily operations. Yet it may have limited visibility of the supplier arrangements and no direct relationship with the provider responsible for maintaining the system.

The lease or associated contracts should make clear which systems the occupier can access, how much control it will have and whether those rights will continue throughout the term. It should also address what happens if technology is changed, withdrawn or replaced.

Crucially, the occupier needs an effective remedy when a system fails. A general promise that the landlord will provide a service may offer limited comfort if there are no meaningful performance standards, response times or consequences for repeated disruption. The landlord’s obligations under the lease or associated contracts should be supported by corresponding commitments in its supplier contracts.

In some cases, direct enforcement rights for the occupier against the PropTech provider may be appropriate. The right structure will depend on the arrangement, but the occupier should know who it can hold to account and how quickly action can be required.

Avoiding open-ended technology costs

The financial implications of a smart building extend beyond the systems in place when the lease begins. Through the service charge, occupiers may be asked to contribute to maintenance, licences, software subscriptions, upgrades, replacement equipment and future improvements or there may be costs recoverable under associated contracts.

The lease and any associated contracts should explain which of those costs can be recovered and whether any limits, exclusions or consultation requirements apply. Without adequate protection, an occupier could effectively write a blank cheque for technology chosen and controlled by the landlord.

That does not mean all PropTech expenditure should be resisted. Sensible investment may improve the building, reduce energy consumption, lower other operating costs and ease ESG reporting. The key is transparency. Occupiers should be able to understand their likely exposure and have confidence that spending will be reasonable, relevant to the services they receive and properly managed.

Particular care is needed where the lease and any associated contracts allow the landlord to introduce new services or make improvements during the term. Those provisions should not become an unexpected route for passing substantial capital or technology costs to occupiers without appropriate safeguards.

Data access is not automatic

Businesses increasingly need environmental and operational data from their premises. However, occupying a space does not necessarily give an occupier  an automatic right to use the information generated within it.

The lease and associated technology arrangements should establish whether the occupier can access building-performance data, use it for reporting and export it into its own systems as well as ownership of data. They should distinguish between raw information and the reports or insights generated from it, and identify who is responsible for accuracy.

This can be particularly important where the occupier relies on the data to measure energy use, report against ESG commitments or demonstrate progress towards carbon-reduction targets. If the information cannot be accessed, verified or transferred, it may not meet the occupier’s needs.

The parties should also agree what happens when the lease ends. The occupier may need time to export records, while both sides will need clarity about retention and deletion. Leaving these questions until departure can result in the loss of information needed for operational, regulatory or reporting purposes.  Also where sub-letting is possible consideration should be given to the rights and position of future occupiers.

Integration, cybersecurity and continuity

Occupiers increasingly want building systems to connect with their own workplace applications and PropTech. Responsibility for integration, compatibility, implementation and cost should be agreed before occupation. The occupier may also need the landlord’s consent to install its own technology, maintain it and remove it at the end of the term or a landlord may want it to be left in the property.

Discovering after completion that an essential platform cannot connect to the building can create expense and disruption. Compatibility should therefore form part of the technical and legal due diligence, rather than being treated as an issue to resolve after the lease is signed.

Cybersecurity and data protection must also be considered. Where smart systems process personal data, the parties should understand their respective UK GDPR obligations.  In addition for all data types security responsibilities and incident-management procedures are relevant. A cyber incident may be more than a data issue if it disrupts access controls or other essential infrastructure.

The occupier should know who will respond, how information about an incident will be communicated and how quickly essential services are expected to be restored. Those commitments should be reflected in service levels and supported by practical business-continuity arrangements.

Look beyond the specification

A smart building can support lower operating costs, stronger environmental reporting and a better  occupier experience. But those benefits depend on the occupier having dependable rights, realistic cost protections, effective remedies and knowing where responsibility and liability lie if things go wrong.

The lease and the technology arrangements should therefore be reviewed together. Before signing, the occupier should know what it can access, what it is expected to pay, who is responsible when systems fail and what will happen to its technology and data at the end of the term.

The smartest building is not necessarily the one with the largest number of connected systems. For an occupier, it is the one where the technology supports the needs of the occupier without introducing costs it cannot predict, dependencies it cannot manage or risks it cannot control.

About the authors

Andrew Evans is a Partner in Irwin Mitchell’s Commercial team 

Laura Jones is a Senior Associate in Irwin Mitchell’s Real Estate team

Vashi Suddul is a Solicitor in Irwin Mitchell’s Commercial team