Peter Williams highlights a consultation about potential changes to the Model Commercial Lease to take account of the forthcoming Minimum Energy Efficiency Standards
The working party that drew up the Model Commercial Lease (“MCL”) has issued a consultation on potential changes to the lease to take account of the new Minimum Energy Efficiency Standards (“MEES”).
As with any new piece of legislation, MEES may require landlords to include new or altered provisions in their commercial leases.
The original intention of the working party when drawing up the MCL was that it should strike a fair balance between landlord and tenant, and represent – in the majority of cases – the compromise position that is reached in a typical lease negotiation. Clearly, with a new piece of legislation, it is difficult to establish what such a compromise position should be.
The working party’s initial views are set out in the consultation paper and summarised here. Readers’ views are welcome ahead of the consultation deadline on 26 October.
This article, and the consultation paper, consider only changes to the MCL. However, the issues discussed may also serve as a useful checklist in relation to other forms of lease. While this article considers only the implications for commercial properties, residential properties are also affected.
Possible changes to leases
Alterations
Should the landlord be able to prevent the tenant carrying out any alterations that might adversely affect the environmental performance of the premises, or that would result in a lower energy performance certificate (“EPC”) rating?
The working party’s initial view is that such additional provisions are not needed. The concept of reasonableness is wide enough to allow the landlord to withhold consent on any occasions when this would be appropriate.
Energy performance certificates
It has been suggested that tenants should be prohibited from obtaining an EPC unless it is legally required; and that in such a case the tenant should use an EPC commissioned by the landlord. This is likely to be more accurate as more data about the building will be available.
Rent review
Should there be any new rent review assumptions to take MEES into account? A rent review provision assumes a notional letting. If the landlord is required to carry out works in order to comply with MEES, the tenant could argue that any notional letting would be unlawful, which could reduce the letting value.
The MCL already contains an assumption that the premises may lawfully be let and used for the permitted use by any person throughout the term of the hypothetical lease, which is thought to be sufficient.
Recovery of costs
Compliance with MEES may entail the landlord expending money on the building, which it may wish to recover (in whole or part) through the service charge provision or the statutory compliance provision.
Where the cost of energy efficiency improvements is, in legal terms, merely repair (such as replacing a life-expired piece of kit), the landlord will be entitled to include the cost in the service charge.
There is already a head of recovery in the service charge provision that permits the landlord to include in the service charge: “Auditing the environmental performance of the [building] and, where reasonable and cost-effective to do so, implementing the recommendations of any environmental management plan the landlord has for the [building] from time to time.”
It is therefore thought that there is no need to include any further drafting.
Yielding-up
It has been suggested that there should be an additional provision in the yielding-up clause that the tenant should yield up the premises with an EPC rating either: (i) at least the same as at the date of the letting; or (ii) no lower than the MEES rating from time to time.
The working party believes that this could require the tenant to improve the building and therefore would not be appropriate.
Subletting
Should there be any requirement on a tenant to improve the premises before subletting it, if this is required by MEES?
The working party believes that such a provision would not be necessary, since the tenant is required to comply with legislation.
Landlord’s right of access
Should there be a landlord’s right of access to the premises to carry out energy efficiency improvements?
It was thought that most landlords would be unlikely to want such an express provision, since it is arguable that this could deprive them of the right to claim the exemption that the tenant would not consent to any necessary cost-effective energy efficiency improvements, which might otherwise be available.
• The closing date for the consultation is Monday, 26 October 2015. The MCL consultation paper and details on how to respond can be found at: www.modelcommerciallease.co.uk
Minimum energy efficiency standards
From April 2018 it will not be lawful to grant a lease of a property with an EPC rating lower than E unless all cost-effective works to improve energy efficiency have been carried out (or there are no such works), or one of the exemptions applies.
From 2023 it will not be lawful to continue to let such a commercial property, with the same caveats. The rules will not apply to properties that do not need an EPC.
There are various exemptions in the regulations. If an exemption applies, a landlord will be able to let a property even if its EPC rating is lower than E, but the exemption must be registered. The standard exemptions last for five years. In a limited number of cases, exemptions last only six months.
The Department for Energy & Climate Change has promised non-statutory guidance, expected to be available next year.
Peter Williams is a professional support lawyer at Shoosmiths LLP and a member of the MCL working group
