The UK commercial property market is experiencing a seismic shift, spurred by ambitious Net Zero ambitions and tighter regulation. For both tenants and landlords, these clauses are a paradigm shift in the way property is operated, managed, and valued.
Shifting to a low-carbon economy requires cooperation, and the commercial lease is the key tool to make this possible. Here at Kaiser Solicitors, we understand that the way ahead involves not just intimate knowledge of property law but constant attention to the practical and cost effects of environmental requirements.
The Regulatory Imperative: MEES and the Road to EPC ‘B’:
Whereas MEES now render it illegal to let or to continue letting a non-domestic building with an Energy Performance Certificate (EPC) rating under ‘E’, future standards are enormously more stringent and directly influence lease drafting and capital spending planning.
Impact on Lease Drafting for Landlords:
Against the backdrop of imminent deadlines, landlords are insisting on ever-stronger green clauses to guarantee that their properties remain saleable and compliant.
Limit Tenant Changes: Preventing tenants from making any works or changes that may worsen the building’s EPC rating or green performance.
Require Access for Works: To give the landlord an open, unencumbered right of access to the property to perform EPC inspections, energy upgrade surveys, and, most importantly, the remedial or upgrade works necessarily needed to achieve the 2027 ‘C’ and 2030 ‘B’ standards. Address Service Charge Recovery: Enabling the landlord to recover the expense of environmental improvement works via the service charge. This is extremely controversial, since tenants will fight against paying for ‘capital improvements’ that accrue mainly to the value of the landlord’s long-term asset.
Tenant Considerations and Protections:
Tenants cannot turn a blind eye to MEES. Although the landlord carries statutory responsibility, a tenant’s capacity to assign, sublet, or even extend a lease can be greatly restricted if the property is ‘sub-standard’. Negotiating green clauses entails for the tenant:
Resisting Burdensome Obligations: Tenants need to resist being burdened with the sole financial or legal burden for the landlord’s MEES compliance works.
Managing Operating Expenses: Demanding provisions which guarantee that any energy efficiency measures actually result in a decrease in their long-term operating expenses and a promise by the landlord to advise on and reduce disruption from access works.
Shielding Against EPC Drop: Safeguarding a clause that excludes the tenant’s environmental enhancement from the grounds of rent review, thus incentivizing positive green works without risk of a future rise in rent.
Conclusion:
Green clauses are becoming market standard and a key tool for risk management. They require a change of mindset for landlords and tenants alike to being co-operative, prompted by the twin drivers of regulatory compliance and corporate ESG reporting.
In order to talk about how the changing MEES requirements and increased use of green clauses affect your commercial property portfolio, contact us today at Kaiser Solicitors for a professional consultation.
