Being Green - The Struggle for Power
Climate change, the environment and making our surroundings "greener" are rarely out of the press. The external and internal pressures for businesses are increasing and the Government keeps changing the goal posts in terms of meeting certain criteria to help combat the UK’s contribution to global warming. These pressures could create tensions between landlords and tenants as they both seek to contribute to being green in their own way.
The rise of green leases over the last few years has been positive and this will hopefully lead to a combined efforts between Landlord and Tenants to reach the Government’s targets. The aim to reach net zero by 2050 is seen by some landlords as a reasonable and indeed some are already investing in their portfolios to take them to this goal or reaching net zero earlier than 2050. Tenants are also requesting “greener” properties with better facilities, cheaper operating costs and which help promote their business as energy efficient.
What if a landlord already lets and a tenant already occupies a typical property which meet the current criteria but will require future works; will a lease renewal process impose further obligations on the tenant? If both parties want a more energy efficient building but a minimum outlay (given the rising costs of supplies and materials) where should the obligations sit? Court cases on these issues are beginning to increase and the most recent, Clipper Logistics Plc v Scottish Equitable Plc shows the court’s direction on lease renewal negotiations.
In the case of Clipper Logistics Plc v Scottish Equitable Plc, the tenant of an industrial unit asked the court for determinations regarding proposed terms of a new lease which could not be agreed between the parties. One of the key issues for the tenant was the proposed inclusion of clauses concerning compliance with energy efficiency regulations. The landlord requested the following clauses to be added into the lease renewal;
a) To prohibit the tenant from carrying out alterations or additions to the property which would result in the property having an energy performance rating below Band E.
b) To require the tenant to indemnify the landlord for the cost of obtaining a new Energy Performance Certificate (“EPC”) if they were to make any alterations which invalidated or adversely effected the EPC.
c) To oblige the tenant to maintain the current EPC rating, return the premises to the landlord with the current EPC rating and promptly carry out remedial works to restore the EPC rating if it decreases.
The clauses a) and b) were deemed to be unreasonable by the court as it noted the Energy Performance of Building (England and Wales) Regulations 2012 and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (together the “MEES Regulations”) are specifically placed upon landlords. The proposed clauses would unfairly and unreasonably impose obligations on the tenant which in law are the landlord’s responsibility.
The court did, however, allow the proposed clause c) to be inserted into the lease as this was a fair and reasonable term and would form part of any dilapidations claim by the landlord.
In coming to their conclusions on the case, the court quoted Lord Hailsham in the case of O’May v City of London Real Property Company Limited which uses a fair and reasonable test for lease renewals;
“The overriding question is whether a proposed change can be justified on grounds of “essential fairness” between landlord and tenant”
Other recent county court cases have provided decisions along the same principles. The case of Poundland Limited v. Toplain Limited permitted, on behalf of the tenant, the insertion of a MEES Regulation clause in the renewal lease. The tenant sought to introduce a requirement on the landlord to meet the costs of any works required to enable the property to meet the energy efficiency standards. Whilst the landlord argued the standard clause of complying with statutory obligations covered the position the Court held that the additional clause proposed provided clarity.
In the case of Saville-Edells and Saville-Edells v. Jan the landlord wanted to include a new right of access to enable EPCs to be produced to comply with the MEES Regulations. However, the Court determined the current lease terms were sufficient to enable the landlord to obtain access to the property for these purposes.
Although the above county court decisions will not be binding precedent, it will be a relief for tenants to see the courts resisting pressure from landlords for tenants to undertake the burden of the MEES Regulations. The courts have shown in the three cases above that a fair and reasonable approach will be required when negotiating the terms of a lease and that one party should not necessarily carry all the burden.
It will be interesting to see where green leases and both landlord and tenant requirements move to over the next few years. Some commentators have stated there could become a two-tier market where Landlords of a greener building will be able to request a higher rent and green leases will contain certain clauses such as the tenant having a maximum energy consumption and landlords would be allowed to/ or have installed energy monitoring so landlords and tenants alike can monitor how much energy they use. There is no doubt the next few years will be interesting as businesses try to meet certain Government criteria but hopefully this will bring about mutual opportunities and understanding for all parties.
For more information on the above please contact Sarah Keens or your usual Charles Russell Speechlys contact.