A setback for “Green Leases”?
The County Court has not taken the opportunity to promote environmentally friendly clauses in commercial leases in the case of Clipper Logistics Plc v Scottish Equitable Plc (Clipper). This article considers the case, and its impact on landlords, and property practice in general.
Landlords of commercial property have been prohibited from granting a new or renewal tenancy of premises with inefficient energy ratings since 1 April 2018 under the “EPC” regime. From 1 April 2023, landlords who continue to rent ‘sub-standard’ properties could be fined up to £150,000.
In Clipper the tenant brought proceedings after serving a notice requesting a new tenancy under section 26 of the Landlord and Tenant Act 1954 (LTA 1954). The parties were at odds about the tenant covenants regarding alterations being proposed to be included by the landlord, which sought to include new clauses that would prohibit the tenant from making alterations that negatively impacted the energy efficiency of the property. This ended up in the County Court, which had to apply section 35 of the LTA 1954, to determine the terms of the proposed new tenancy “by reference to the current tenancy and all relevant circumstances”.
The judge held that the landlord’s green-driven desire to prohibit unfriendly alterations could not be said to be a “relevant circumstance” and said that the lease already contained other covenants that satisfactorily protected the landlord from liability under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations) in this circumstance. The new ‘green covenant’ therefore could not be included in the new lease.
However, the landlord was allowed to impose a new restriction in the new lease that any alterations should not push the Energy Performance Certificate (EPC) rating below its current rating, which may in reality amount to the same thing.
It is disappointing that the Court passed up on an opportunity to hold that a wish to promote environmental sustainability is a “relevant circumstance” for the purposes of section 35 of the LTA 1954. Not only does this expose landlords (that cannot rely on other covenants) to the risk of a financial penalty during the term; it also appears to contravene the spirit of the MEES Regulations. On the other hand, the decision is not binding in other cases, and a different judge or the appellate courts may well decide to go down a different legal path if the opportunity arises again. How the law develops in this area remains to be seen.
If the new restriction that the judge did allow to be included is followed in other cases, we could see the emergence of a trend for landlords to seek similar provisions in renewal leases preventing a tenant from carrying out works which lower the EPC rating; that will work well if the landlord knows the EPC rating already (or is sure that it will not be below “E” if an EPC is obtained).
In some circumstances, however, landlords might wish to avoid obtaining an EPC certificate altogether. The MEES Regulations only apply to premises with an EPC certificate. There is currently no requirement to provide or obtain an EPC on a lease renewal if there is no EPC in place (but see below). If it is anticipated that the EPC rating would be below “E” (or, from 2027, a “C” rating), it would be prudent for a landlord to insert a provision in the renewal lease preventing its tenant from obtaining an EPC certificate without the landlord’s consent. This would protect landlords from potential liability under the regulations.
It should be borne in mind that the government’s March 2021 consultation on The Non-Domestic Private Rented Sector Minimum Energy Efficiency Standards will extend the scope of the MEES regulations to cover lease renewals by requiring landlords of rented properties to provide an EPC on a lease renewal. The proposals outlined in the consultation will start to come into force between 1 April 2025 and 1 April 2030. For now, it is unclear when exactly this particular proposal will come into force within this 5-year implementation process, but we can be sure that the requirement will come into force at some point. We will keep you updated on this.
If you would like to know more about lease renewals, sustainable or “green” lease provisions or the MEES Regulations, please contact a member of the Real Estate team.
Article contributor – Alekh Singh – Paralegal