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Minimum Energy Efficiency Standards and Lease Renewals

From 1 April 2018, the MEES require landlords of commercial buildings to make all relevant energy efficiency improvements to their property to be able to grant a new lease, or a renewal lease, to a tenant. Currently the minimum rating that a building must achieve in its Energy Performance Certificate (EPC) is a rating of E (on a scale of A-G, with A being the highest rating). From 1 April 2023, any landlord who has not carried out the required works under the MEES may be liable for a fine of up to £150,000.

In the recent case of Clipper Logistics Plc v Scottish Equitable Plc, the question of the implications of the MEES for landlord and tenants on the renewal of a lease was put to the Court.

In this case, the tenant served a Section 26 notice on the landlord under the provisions of the Landlord and Tenant Act 1954, requesting a new lease of its premises after expiry of its existing lease. The property was a distribution centre constructed in the 1980s.

In light of its obligations under MEES, the landlord sought to add updating ‘green clauses’ into the lease to prevent the tenant from carrying out alteration works to the property which could reduce the EPC rating to an F or G, an indemnity from the tenant for the cost of a new EPC in the event such alterations were carried out and obligate the tenant to reinstate the alterations to lift the EPC rating back up to an E or higher, should the tenant’s works reduce the rating.

These clauses were rejected by the Court on the basis that the terms of the expired lease contained an absolute prohibition on structural/external alterations by the tenant, with internal alterations being permitted with the landlord’s prior consent. The Court felt these clauses were enough to protect the landlord from works being carried out by the tenant which would reduce the EPC rating. The tenant also successfully argued that the burden of the MEES should not fall on it because the regulations impose the majority of the obligations on landlords. A clause stating the tenant shall return the property with the same EPC rating as at 1 June 2021 was suggested by the Court as a compromise between the parties.

Whilst Clipper Logistics Plc v Scottish Equitable Plc is not binding law, it shows the approach the Court may take in deciding any other disputes relating to MEES in lease renewals.

It further highlights the need for landlords to consider whether they need to reserve rights to carry out energy improvement works in a lease of their property. A tenant’s alteration covenant may address the issue of preventing works which would reduce the energy performance of the building but would not deal with a situation where the tenant has kept the property in repair, but the EPC rating is still reduced. For example, a boiler in a property may be well maintained by a tenant and functional but may still reduce the EPC rating if it is very old and therefore not as efficient as a modern boiler.

If you would like to discuss the MEES regulations and the implications for leases of non-commercial buildings (whether you are a landlord or a tenant), please contact Miriam Carr via email: mail@clarkeandson.co.uk or call at 01256 320555.

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