In an ideal world, a lease renewal will proceed smoothly with the landlord and tenant reaching swift and amicable agreement on the renewal lease terms. Landlords and tenants will be familiar with the longstanding points of contention, such as rent. However, it is becoming more and more common for landlords to propose other terms which did not form part of the original lease, especially clauses which relate to energy efficiency.
The Issues
Such clauses are more commonly being added to lease renewals, particularly given the intended changes to the minimum energy ratings (with the minimum rating likely being increased to a C by 2027 and a B by 2030). What does this mean for the tenant’s obligations, or the landlord’s? To what extent can the landlord pass the buck to the tenant?
This is precisely what the Courts have been grappling with in recent cases. The Courts have been considering the inclusion of modernising provisions in leases which seek to protect the landlord from risks associated with the Minimum Energy Efficiency Standards (MEES), an example of a so called "green lease" term. It is often the case that lease renewals will “modernise” the existing lease, but the question is now being asked: to what extent will the addition of brand new energy efficiency clauses be allowed as simple “modernisation”?
The Current Situation
The courts are aware of and appreciate the heavy burden imposed on landlords by the existing MEES regulations. However, as more landlords look to improve the energy efficiency of their properties, it is becoming clearer that the courts may not tolerate landlords’ attempts to offload their green liability where that would impose new and additional burdens on tenants. If a landlord wants to impose additional obligations on a tenant, they must be ‘fair and reasonable’ in the circumstances.
The starting position is that it is the landlord’s responsibility to comply with energy efficiency regulations. The Courts have acknowledged that, without any mechanism to regulate the tenant’s actions, a landlord could be placed in breach of the regulations through no fault of their own. However, the Court will not allow any new clauses which they do not believe to be necessary, and the aim is always to strike a fair and reasonable balance between the parties and only add clauses which can be justified on the grounds of essential fairness.
The EPC clauses which already exist in the previous lease will be considered against any proposed new clauses. The Court will then decide if the landlord already has sufficient protection, or if the clauses when all taken together place too high a burden on the tenant.
Going Forward
Despite the guidance outlined above, it is still a little too early to say where green leases and landlord and tenant requirements will move to over the next few years. It is likely that we will continue to see a growing number of "green lease" terms being proposed in new leases and in lease renewals. We are already seeing the emergence of a two-tier market whereby landlords of a greener building will be able to request a higher rent. Will there be a move towards the Court looking favourably on any clause which purports to improve an EPC rating, or sustain a high one, given the increased focus on environmental sustainability? It will be interesting to see the answers to these questions emerge over the coming months and years.
It is important for both landlords and tenants to keep up to date with this fast-changing area and to seek advice on the latest position, especially when considering new leases or lease renewals.
If you require assistance in relation to energy efficiency clauses or commercial leases in general, please contact Beth Margetson, Phil Hunt or Jack Cook.
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