A recent survey of prices paid for offices in London shows that a premium has developed for buildings that have accreditation for sustainability from organisations like British Research Establishment (BREESM) and US Green Building Council (LEED) when compared with buildings which don’t have these green credentials. According to the analysis, the gap between the prices has reached 25%.
Investors are increasingly focussing on sustainability. Other landlords (and tenants) need to be aware of the issues as well so they are not caught out by future changes in the minimum energy efficiency standards (MEES) required in respect of commercial property. See our article in this issue for more information about MEES. This article will consider the impact of MEES on lease drafting both in terms of new leases and interpreting existing leases.
Lease issues
It is estimated that one million commercial buildings need to be improved for efficiency purposes by 2030, which is 85% of the stock.
Landlords are liable for compliance with the MEES regulations. They don’t impose a positive obligation on landlords to carry out energy efficiency improvement, but they do expose them to enforcement action and financial penalties in the event of breach of the regulations.
Landlords should be auditing their portfolios to understand how the length of lease terms may impact upon their position. Do they have leases expiring so that they will have an opportunity to carry out improvement works whilst the building is vacant? Landlords need to especially consider existing leases which will continue through 2023, 2027 and/or 2030 and whether lease provisions allow them to carry out upgrading works whilst the tenants are in situ.
Landlords and tenants negotiating new leases have an opportunity to agree lease provisions to deal with any works that may be required, access to carry them out and who will bear the cost. Furthermore, landlords may well struggle to introduce novel provisions on renewals of existing leases. A recent case in the County Court (Clipper Logistics Plc v Scottish Equitable Plc) held that a landlord could not introduce certain green lease provisions in the context of an unopposed lease renewal under the Landlord & Tenant Act 1954. Although non-binding, this decision shows a potential obstacle to greener lease renewals.
Relevant clauses
The main areas to consider are:
- do the rights reserved to the landlord go wide enough? The clause may be too limited to cover the landlord entering the premises and carrying out improvements. Note however that such a clause will probably mean that the landlord is unable to seek to rely on the consent exemption discussed here in this issue.
- checking service charge provisions for recoverability. If the landlord wishes to recover the costs of the upgrades through the service charge, then, as on the face of it the works will be improvement works, they may well not fall within the heads of recoverable expenditure under standard service charge provisions. Astute tenants will resist attempts to make them pay.
- if the landlord carries out improvement works to the common parts or shared services of the building, will this cause an interruption to the delivery of services by the landlord? This may put a landlord in breach of its obligations.
- do the alteration provisions prevent the tenant from carrying out alterations which would adversely affect the environmental performance or EPC rating of the premises or the building?
- are there provisions which restrict the tenant’s ability to commission an EPC? From the landlord’s point of view, they should only be able to do it with landlord consent and/or using the landlord’s energy assessor.
- do the leases contain green lease provisions? Examples of these such as those published by the Better Buildings Partnership have been around for some time now.
The MEES deadline coming in April 2023 is a timely reminder for landlords to consider how the MEES regulations impact upon their properties, but also how the provisions in their leases may affect their strategy for compliance.