Court agrees a vital new ‘green lease’ clause

A recent court case shows the importance of keeping commercial lease clauses up-to-date with changes in new legislation, in particular there’s one clause that should be inserted into every commercial lease to take account of the new energy efficiency rules.

Under the Landlord and Tenant Act 1954 – the legislation governing commercial tenancies – there is provision for the courts to get involved where the landlord and tenant cannot agree on lease terms at renewal.

This is pertinent when one or other of the parties wish to vary the terms, usually as a result of changes in circumstances or new legislation enacted during the course of the lease term. In these cases the court has the ability to step in and determine the terms if the parties cannot agree.

An important case

In a recent property litigation case involving Clipper Logistics Plc v Scottish Equitable Plc (2022), the landlord (Scottish Equitable) called for three new covenants to be introduced into the lease.

Some of the landlord’s proposed changes were agreed upon between the landlord and tenant before this court trial, but there were other proposed changes which could not be agreed and were left to be determined by the County Court.

The desired changes by the landlord came about due to the impact of more recent environmental legislation, more specifically MEES and the property’s EPC rating. The landlord was obviously concerned that any detrimental changes to this rating, brought about by the actions or inaction of the tenant, could have consequences for itself.

Therefore the landlord wanted to have three new clauses inserted into the lease, these being:

1 – a Prohibition Clause to prevent alterations the tenant made to the property resulting in the property’s Energy Performance Certificate (EPC) grade falling below band E and thus rendering the property ‘sub-standard’

2 – an Indemnity Clause against the cost of a new EPC certificate in the event that such alterations were made to the property

3 – a Reinstatement Clause requiring the tenant to maintain the current EPC rating throughout their tenancy, and to do this by implementing remedial works if necessary.

The determination

It was determined that the onus was on the party requesting the changes (the landlord) to persuade the Court that the proposed changes were fair and reasonable.

The question was, would updating the lease with these clauses on renewal be reasonable to take account of legislative updates (e.g. changes to the energy performance of the building) – would it amount to reasonable modernisation of the lease?

The pandemic related events of the past two years have seen changes in commercial lease drafting evolve very quickly because of the many issues arising. As a result, the courts now are having to consider whether to approve lease terms that were not even on the radar before March 2020.

In Clipper Logistics the Court noted that most of the obligations relating to the energy performance regulations rest with the landlord rather than the tenant. The court considered that when the three clauses were all taken together, the proposed covenants would unfairly and unreasonably shift the burden of complying with these duties from the landlord onto the tenant.

The Court argued that the proposed Prohibition Clause was not necessary as the existing lease already contained terms preventing the tenant from making alterations to the property. Further it ruled that the Indemnity Clause was too burdensome for the tenant to adhere to.

However, the Court held that the requirement in the Reinstatement Clause for the tenant to return the property with the same EPC rating as when the tenant took over the lease was fair and reasonable and should be implemented in this case.

The Reinstatement Clause therefore is an important one having the effect of protecting landlords against any potential action or inaction by the tenant which might render the property as ‘sub-standard’ with regard to the EPC rating.

A clause requiring the tenant to “return the premises to the Landlord with the same EPC rating as it has as the date of this Lease” was therefore considered a fair and reasonable addition to protect the landlord from inaction by the tenant over a 10 year term.

Lease terms in Future

Given the proliferation of new environmental issues affecting property, it is likely there will be more ‘green lease’ terms to be introduced in both new leases and on lease renewals. Increasingly, ambitious reforms aimed at the UK’s net zero targets will likely necessitate this.

This court judgment indicates that courts do have some awareness and indeed some sympathy for the vulnerability of landlords, with the onus being on them to reach certain regulatory standards when the building is outside of their control, i.e., tenanted.

The existing Minimum Energy Efficiency Standards (MEES) regulations are exacting, but the court considered that adding more obligations on tenants to attempt to reduce the landlord’s liability under the legislation would not be fair or reasonable in the context of lease renewals.

In the Clipper Logistics case, the court took into account the existing lease clauses which offered a good degree of protection to the landlord. But the case also shows that a landlord cannot assume that it will be able to include clauses to protect its own position in relation to MEES without careful consideration.

An important consideration with any new lease contract: the parties can agree to the inclusion of any clauses they like, but if the courts won’t enforce them, they are effectively useless.

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