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Cleaner and greener leases?

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15/10/2013

As we reported in the summer edition of Real Estate Matters, the Energy Act 2011 (the Act) could have far reaching implications for owners of commercial property. The Act contains provisions which impose an obligation on the Secretary of State to make regulations before 1 April 2018 to ensure that a landlord of commercial property, for which there is an EPC which falls below a certain level, does not let such property until it has made energy efficiency improvements. In addition to applying to new lettings, the Act also confirms that ‘to let’ can be defined to include ‘continue to let’ meaning that it will apply equally to renewals of existing leases. This could, quite clearly, prove problematic for landlords who have granted leases protected by the Landlord and Tenant Act 1954 (the 1954 Act) as it is unclear to what extent they could insist on the inclusion of new terms in the renewal lease dealing with energy efficiency measures.

Green leases

Green lease provisions can vary enormously and there is no one provision that makes a lease ‘green’. Broadly speaking a green lease contains a series of provisions that either encourage or require the parties to reduce the environmental impact of the demised premises. Such clauses may impose fairly negligible obligations such as sharing data on fuel consumption, or be much more onerous, for example covenants restricting certain types of alterations or which penalise certain types of behaviour. The implications – in terms of cost – of the different types of provisions, are likely to be very different.

If a landlord wished to introduce a new arrangement for the collection of waste for recycling and pass on the cost to tenants via the service charge, it is likely that the cost would be relatively low, and as such the tenant is unlikely to object. On the other hand should the landlord wish to pass on the costs of making substantial energy efficiency improvements to the property (as the Act may require) the expense is likely to fall outside the service charge arrangements (which generally only allow the landlord to recover the costs of repairs, and not improvements). In such cases, a tenant is unlikely to consider it reasonable for such costs to be passed on to them (albeit, to the extent that the improvements are of benefit to the tenant, there may be a costs implication to them on the next rent review).

The 1954 Act

In the absence of agreement between the parties, the 1954 Act confirms that disputed terms of a lease may be decided by the court. In reaching a decision as to such terms, the court must take into account the terms of the current lease as well as considering the relevant circumstances of the matter. The House of Lords [1] decided that the burden, of convincing the court to change the terms from those that existed under the current tenancy, rests with the party proposing the change. Further, any change should only be made if it is fair and reasonable in the context of the case. As a result, courts tend to be fairly reluctant to depart from the status quo if a departure would lead to the imposition of more onerous obligations or lead to increased expense for one party.

It is entirely possible that the court may take into account increased awareness of the environmental impact of commercial buildings when considering whether to impose new leases clauses under the 1954 Act. The probability of them doing so is likely to increase once the regulations required under the Act are in force, as the regulations will impose obligations on the landlord that they may not have foreseen when originally agreeing the current lease. From a pragmatic perspective, it is also possible that, provided that to do so is not too detrimental to a tenant, the court will permit the inclusion in renewal leases of such clauses as are required to ensure that a tenant will cooperate with a landlord to secure the efficient use of energy within a building.

Comment

It is clear that what is considered fair and reasonable by a court when imposing new lease terms will be influenced by the circumstances prevailing at that time and that the increased awareness of the energy efficiency of buildings is likely to have an impact on court decisions. The imposition of minimum energy efficiency levels by the Act will, no doubt lead to more ‘green’ provisions being imposed over time.

Landlords and tenants may be well advised to start addressing such matters at an early stage and accepting that the inclusion of some ‘green’ clauses may well eventually become inevitable as the law progresses. Such acceptance may well lead to a less protracted lease renewal process and avoid the matter ending up in court.

The Better Buildings Partnership (BPP) toolkit, the second edition of which has just been published, could provide landlords and tenants with some guidance as to what is considered best practice in terms of green lease provisions and collaboration between owners and occupiers of commercial property. It sets out a number of specific actions which the owner, occupier or managing agent should consider and model green clauses for incorporation into new leases. It is hoped by BPP that the explanation of the purpose and effect of the model green lease clauses in the toolkit will encourage adoption of such clauses and a framework for the parties to the lease to reach agreement on how to achieve energy efficiency improvements.

[1] O’May v City of London Real Property Co Limited [1983] 2 AC 726

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