What environmental implementations for commercial property leases are coming into effect?
The UK government set a legally binding obligation that by 2050 the UK’s greenhouse emissions reach “net zero”. As part of their plan to achieve this target the government has outlined a series of measures that landlords of commercial property will need to follow if they wish to continue leasing their property.
It is a legal requirement that on the sale or lease of a commercial property an Energy Performance Certificate (EPC) is given (unless the property is exempt). If a landlord wishes to lease their property, the EPC must have at least an “E” rating.
The current “E” rating under the target is then required to be improved to a “C” rating by April 2027 and then a “B” rating by April 2030.
Why should landlords beware?
A five-year lease granted in 2023 will need to comply with the current requirements of having an EPC rating of “E”. The future implications will require that the EPC rating be increased to a “C” prior to the lease expiry, and if renewed, this will require that the property be increased to a “B” by 2030. A landlord will therefore need to carry out works to their building to ensure that it is achieving these targets.
Most commercial leases state that any improvements (rather than maintenance which is collected via a service charge) are to be at the cost of the landlord. Such works could be invasive and cause disruption to a tenant while works are being carried out and therefore a landlord will need to take great care to ensure that they do not impinge on services, rights and quiet enjoyment afforded to their tenants.
In some cases, a landlord may find the arrangement so impractical that they may need to take back possession of the whole of their building to redevelop to meet these targets, meaning that in addition to the cost of the improvement works, they will also lose the revenue they would receive from any tenants.
These improvement works may increase the overall value of the building, which is a benefit to a landlord. The landlord can then charge a premium rent to tenants. However, in a tenant driven market this may not always be the case.
What are the penalties for non-compliance?
Failure to comply with the regulations can mean a penalty for the landlord. These are staggered whereby renting out a non-compliant property for less than 3 months will attract a fine of 10% of the rateable value of the property up to a maximum of £50,000. If the non-compliant property is let for a period of more than 3 months, it will attract a fine of 20% of the rateable value of the property up to £150,000.
Some exemptions can be claimed, but providing false or misleading information to the Exemptions Register will also attract a fine of £5,000 and a publication of non-compliance naming the landlord.
Should tenants beware?
The implementation of any improvements will have a cost implication. It will be on the interpretation of the lease terms (and any side agreements) as to how these will be implemented. It is a growing trend within commercial leases for a landlord, in addition to collecting maintenance payments via the service charge, to include improvement costs.
A typical tenant will not want to bear the costs of improvement works carried out by a landlord to the landlord’s building, especially where they only benefit from a short-term commercial lease (5 - 10 years) which does not have the option of renewal at the end of the term. Especially if the tenant will then be expected to pay an increased rent in view of the landlord’s improvement works should the lease be renewed at the end of the term.
Care should be taken to ensure that a tenant is aware of their commitments to contribute towards the landlord’s improvement works and how such works are likely to interrupt their business practices.
Should a lease include “Green Provisions”?
At present there is no legal obligation in either the public or private sector to use “green provisions”. However, they are advisable to ensure that a lease is future proof and progressive given corporate reporting requirements.
Green provisions can include issues such as water management, waste management (including recycling), the use of sustainable materials, heating and cooling services and incorporated services to encourage the use of green transport, such as the inclusion of showers and cycle storage within the building.
These governance features lower the carbon footprint that the landlord’s building produces, making it more attractive to businesses who are now required as part of their corporate reporting to submit Environmental, Social and Governance (ESG) measures as part of their annual reporting.
How 3CS can help
For legal help and advice with your commercial lease or building, or any commercial property legal matter, please get in touch with your usual 3CS contact.
