Energy Efficiency and Commercial Leases
This month we have begun the process of amending our commercial lease templates for shops, offices, industrial and other business premises to include new provisions relating to energy efficiency.
These amended leases put the Landlord in a better position to manage any energy efficiency changes they may need to make to their premises. Accordingly, the updated leases can be used straight away and in advance of the new changes coming in.
So far we have updated all our office lease templates. In the next month or so we will update the rest of our commercial leases.
We have also taken the opportunity to modernise the language used in the templates and to bring the terms into line with current market practice.
Why is energy efficiency an issue for commercial landlords?
From 1 April 2018, Minimum Energy Efficiency Standards (MEES) will come into effect. A landlord will be unable to grant a new lease of a commercial (or residential) property with an Energy Performance Certificate (EPC) rating below “E” unless an exemption applies.
From 1 April 2023, a landlord will be unable to continue to let a commercial property that has an energy rating below an E.
Commercial landlords therefore need to take steps to assess and if necessary improve the EPC ratings of their properties.
What are the exemptions?
The exemptions are set out in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. The key exemptions are where:
- The lease has a term of less than 6 months.
- All cost-effective improvements, i.e. works that would pay for themselves through energy savings within seven years, have been undertaken, or there are no such works that could be done.
- The landlord is unable to obtain third party consent to the improvements. This includes the consent of a tenant to enter the property to carry out improvement works.
- An independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% or would damage the property.
What are the new lease provisions?
Our template leases now include the following provisions:
- A right for the landlord to enter the premises to carry out energy efficiency improvement works, if the tenant (in its absolute discretion) consents. If the tenant does not consent, the landlord can rely on the third party consent exemption mentioned above.
- A requirement for the tenant to pay the costs of such energy efficiency improvement works (as it will be the tenant who benefits from the energy savings).
- A prohibition on alterations that would otherwise be permitted if those alterations would adversely affect the environmental performance of the premises.
- A covenant by the tenant not to apply for an Energy Performance Certificate in respect of the Premises without landlord’s prior consent. This is to avoid the possibility of the landlord’s EPC being replaced by a later EPC with a rating below E.
- A rent review assumption that the premises may be lawfully let at the rent review date.
The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.