Sarah Brimacombe of the law firm Clyde and Co LLP has written an excellent article on the Lexology website about the implications of the new minimum energy efficiency standards on commercial buildings. Is there anything comparable in other countries?
New regulations on minimum energy efficiency standards for commercial properties: tenants beware!
New minimum energy efficiency standard regulations, The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (MEES), have recently been passed and come into force on 1st April 2016. MEES will have a significant impact on commercial landlords, and consequently tenants, of properties in England and Wales which have a poor energy efficiency rating, defined under MEES as an energy rating below an ‘E’ under an Energy Performance Certificate (EPC). Any properties below this minimum threshold, i.e. with an ‘F’ or ‘G’ rating (‘G’ being the lowest rating available), will be captured. Landlords will face hefty financial penalties for non-compliance.
These regulations form part of the Government’s broad strategy to improve the energy efficiency of buildings and to meet its national and international climate change targets. The Government estimates that 18% of privately rented commercial buildings have an energy rating below the minimum ‘E’ EPC rating.
MEES introduce two important deadlines for landlords:
- From 1st April 2018, landlords will be unable to grant new leases (including renewals and extensions of existing leases) of property which falls below the minimum ‘E’ rating; and
- From 1 April 2023, landlords will be unable to continue letting property under existing leases if the EPC rating for the property falls below the minimum ‘E’ rating.
Landlords will need to carry out energy efficiency improvements to properties to raise their EPC rating above the minimum threshold, subject to certain exemptions and qualifications. Similar provisions have been introduced for residential property.
Issues for tenants
Tenants with existing leases or prospective tenants considering new lettings of property with a low EPC rating (especially below an ‘E’), need to be aware of any energy efficiency improvement works and expenditure that the landlord may be planning in order to meet its MEES obligations. Many landlords may be considering a programme of works now to ensure that they can re-let or continue to let such properties after the deadlines imposed under MEES.
Landlords will be reviewing existing lease provisions and considering their strategy for compliance with MEES. Tenants need to ensure, where possible, that they do not suffer the disruption of landlord’s works and end up paying for their landlord’s energy efficiency improvements. This will depend, to a large extent, upon the precise wording of their lease provisions.
Principle provisions for tenants to review are:
- Service charges – how widely are these drafted? Most conventional service charge provisions will allow the landlord to recover the costs of ‘repair’ or ‘maintenance’ but not ‘improvement’ or ‘replacement’. In particular, a landlord cannot generally recover the cost of upgrading kit such as air-conditioning and boilers that is still in working order.
- Repairing obligations – to what standard is the tenant obliged to repair? Could ‘repair’ include an obligation to upgrade the premises to a specific EPC rating? This is unlikely in a typical full repairing lease but onerous tenant repair obligations could require this.
- Obligation to comply with statute and other ‘green lease’ provisions – most leases require a tenant to comply with statutory obligations in relation to the premises. Could landlords use this to argue that the tenant must co-operate or carry out energy efficiency improvements itself?
- Landlord’s right to enter the premises to carry out works – does the lease reserve the necessary rights for the landlord to enter the premises to carry out energy efficiency improvement works? Under the terms of the lease, does the tenant have to consent to any request from the landlord to carry out such works? There is no statutory obligation under MEES for the tenant to consent to a landlord’s request to carry out works. In fact, for landlords, there is an exemption to carry out improvements where the tenant’s consent cannot be obtained so it may be in both parties’ interests for the tenant to refuse consent to the landlord’s proposals.
As this is a new area of law it is not yet possible to identify new ‘standard’ provisions and market trends in response to MEES. However, it is likely that landlords of low-rated properties will wish, over time, to improve their energy efficiency and will seek to include provisions in new leases that allow them to do so. Landlords will try to recover at least some of the costs of improvement works on the basis that tenants will benefit, in terms of lower energy costs, from improved energy efficiency.
Principle provisions for tenants and their advisors to consider during lease negotiations are:
- Alterations/change of use provisions – landlords may seek tighter controls on tenant’s alterations and changes of use, particularly tenant’s works and/or uses which could lower the existing EPC rating for the premises or building as a whole. However, tenants need to retain flexibility in their lease terms to enable them to operate and meet changing business needs going forward.
- Service charge provisions – tenants who are not prepared to cover any of the cost of MEES improvements should specifically exclude these from service charge provisions.
- Repair, reinstatement and yield up obligations – landlords may include an obligation to repair, reinstate or yield up the property to a specific minimum EPC rating, e.g. an ‘E’. Tenants should resist any such obligation as it is possible, going forward, that the methodology for determining EPC ratings could change with higher standards being introduced or that, over time, the minimum standard could be raised higher than an ‘E’ EPC rating.
How landlords of affected properties respond to MEES remains to be seen. However, whilst the regulations do not bite until 2018 at the earliest, well advised landlords will be considering their options for improving the energy efficiency of low-rated properties now. Tenants need to be aware of the potential impact of landlord’s improvement works. Whilst it may be in a tenant’s interest to have an energy efficient building it is unlikely to be prepared to meet the entire cost and to suffer any disruption to its business from such improvements works.