Under the Minimum Energy Efficiency Standards (MEES) rules, non-domestic properties in England and Wales are required to hold an EPC rating of at least an E to be classed as lettable. The minimum rating required is set to gradually increase, rising to a C from April 2027 and an A or a B in 2030.
Scotland has a different EPC regime with different standards and currently there is no EPC rating requirement to let premises. It has been suggested that if similar regulations to England and Wales were to be implemented in Scotland, 29% of office spaces would fail to meet the standard currently required in England and Wales. Further, only 21% of Scottish buildings would meet the A or B standard in their current condition.
Scotland has set a target of reaching "net zero" emissions by 2045 and a recent Scottish Government Consultation cited improving the energy performance of buildings as playing a key part in its "net zero" strategy. The Heat in Buildings Bill which is expected to be published this year will clarify what this strategy will mean for Scottish non-domestic property. This could mean, for example, extending the application of Action Plans to more buildings and requiring that energy efficiency works be done at the point of lease or sale or the introduction of minimum energy efficiency standards similar to those which apply in England and Wales.
Whatever measures are introduced, there could be cost involved which will then raise the question of who would be responsible for carrying out the required works where premises are let: would the burden of paying for any works required fall on the landlord or tenant?
We can differentiate works needed before premises can be let to premises already subject to a lease. Where premises are vacant, it will most likely be the landlord who will carry out the works at their own cost to put the premises in a condition that ticks the regulatory box. Where a lease is already in place the position is less clear. This is a very hot topic at the moment, with the industry drive for green leases and ESG credentials meaning that both landlords and tenants are focussed on such provisions (and the cost of implementing them).
Tenant's Repairing Obligation?
If premises are not energy efficient, could it be argued that they are not in good condition and repair?
A tenant is generally required by its repairing obligation to carry out work to the premises that would be required to put and keep them into a good condition and repair. That is the condition one would expect to find the premises had they been managed by a reasonably–minded owner, having regard to their age, character and locality
Energy efficiency and environmental responsibility is a key driver in the current letting market, both for landlords and tenants. As such, the implied standard of 'good condition and repair' will evolve and what would be expected of a reasonably-minded owner will change; energy efficiency (and thus environmental responsibility) may one day be required irrespective of the age, character and location of the premises.
Tenant's Statutory Obligation?
Of course, commercial leases include clauses which make tenants responsible for complying with statutory rules and regulations. If new rules or legislation is passed in Scotland, landlords may be able to require the tenant to carry out the subsequent works by way of enforcing the statutory obligation clause. However the extent to which they can do so, and the input the landlord can have on the nature of the works (having a view to future use of the premises after lease expiry), depends on the lease provisions. We are seeing more and more tenants focussing on such provisions at the time they negotiate the lease. We have considered this in the context of existing Scottish EPC ratings and Action Plans on our May blog, which looks at the current Scottish legislation.
Service charge recovery?
There will also be the question of whether the landlord can recover the costs involved in dealing with the common parts through the service charge. Here, we would differentiate between core or basic statutory compliance (which is likely to be recoverable) from improvements beyond that standard (which is often a contentious issue and will depend on the lease provisions). Our recent blog on service charge exclusions is worth a read in this context.
Given the ever evolving nature of the green lease clauses and also the statutory provisions relating to improving energy efficiency and the drive to net zero, lease provisions addressing such matters are regularly heavily negotiated. We do not yet have an industry standard set of green lease clauses, but it is likely that in time they will be established. Until then, the obligation to not only carry out works but, crucially, the obligation to pay for them, will likely depend on the provisions of the lease and the court's approach to the obligation to keep the premises in good condition and repair.