A recent decision in the County Court has provided useful guidance on how a request to insert energy efficiency clauses into leases during a lease renewal will be treated.
In an ideal scenario, a lease renewal will proceed smoothly with the parties reaching an agreement in respect of the renewal lease terms. Often the most contentious point is rent, however, it is becoming more common for landlords and tenants to propose terms which did not form part of the original lease. A recent County Court case considered this in respect of clauses relating to Energy Performance Certificates (EPC) and a tenant’s obligations in respect of them.
Clipper Logistics v Scottish Equitable PLC concerned an industrial unit in Rotherham and a dispute over the landlord’s proposed inclusion of some green alterations provisions.
In particular, the landlord had sought to include:
- A prohibition on the tenant carrying out alterations which would lead to the property having an EPC rating below band E.
- An indemnity from the tenant to the landlord for the cost of a new EPC if the tenant made alterations which invalidated or adversely effected the EPC.
- An obligation on the tenant to maintain the current EPC rating, return the premises to the landlord with the same EPC rating, and promptly carry out remedial works.
The landlord wanted to include these terms as it was concerned that the EPC rating could be lowered by the tenant, thereby placing the landlord in breach of Minimum Energy Efficiency Standard (MEES) and leaving them with the cost of remediating the property and at risk of financial penalties.
The tenant objected to the proposed clauses, arguing that it should not be required to bear the cost of compliance with MEES as this should fall to the landlord.
What happens when terms are in dispute?
Where one party suggests terms which depart from the terms of the current tenancy, the burden is on that party to persuade the Court to depart from the existing terms. Any change must, in the circumstances of the case, be fair and reasonable as between the landlord and the tenant.
The Court will then look to reach a conclusion which strikes a fair balance between the parties and only add clauses which can be justified on the basis that they are essentially fair.
In the Clipper Logistics case the Judge decided as follows:
- The landlord’s proposed prohibition on the tenant carrying out alterations which would lead the property to have an EPC rating below E was not a reasonable requirement. Indeed, it was held that existing clauses in the lease offered the landlord sufficient protection from any tenant actions which would damage the EPC rating.
- The landlord’s proposals to insert an indemnity for the cost of a new EPC if the tenant made alterations which adversely affected the EPC rating and to impose obligations on the tenant to maintain the current EPC rating would place too significant a burden on the tenant. This was particularly the case where the majority of the EPC/MEES obligations are expressly placed by legislation on landlords and not tenants.
What does this mean for lease renewals going forward?
It is becoming increasingly common for parties to lease renewal proceedings to include clauses which reflect the then-present circumstances. A good example of this was in response to COVID-19 lockdowns, where the parties in lease renewal proceedings sought to introduce rent concession clauses which would be triggered by a pandemic event.
Although there are often good reasons for proposing new clauses, the Clipper Logistics case, while not binding on higher courts, serves as a reminder for parties to a lease renewal that, should they attempt to propose new terms, they must be reasonable in the circumstances. Any proposals should not place onerous obligations on either party unless there is a good reason for this.