This was the question posed in the unreported case of Clipper Logistics Plc v Scottish Equitable Plc, in the County Court at Sheffield. The case involved routine lease renewal proceedings in England & Wales, in which the parties were in dispute over the landlord's request to impose clauses in a new lease, which would be existing after the prohibition on commercial landlords letting property after 1 April 2023 with an EPC rating of below band E (for more details on these changes, please visit our blog here).
The "green" provisions sought by the landlord
The landlord was seeking provisions to: prohibit the tenant from carrying out alterations or additions that would reduce the property EPC rating below the 1 April 2023 standard of band E, an indemnity for the cost of obtaining a new EPC certificate in the event of alterations impacting the EPC rating, and requiring the tenant to maintain the current rating, returning the property at the current rating and carry out remedial works required to restore an EPC to the current rating.
Powers of the court
In a lease renewal under the Landlord and Tenant Act 1954 (1954 Act), the court has the power to impose new lease provisions, but it is a heavy lift by the party seeking those new provisions to convince a court to award something which is outside a reasonable modernisation of those terms of the existing lease.
The landlord argued that the provisions were reasonable, in contemplation of the legislative changes soon to come into force and which would be in force for a long period of the 10-year lease term.
The court accepted that the landlord was exposed to the risk of the EPC rating dropping below E after 1 April 2023 and such risk required protection. But, in determining what was fair and reasonable, the court held it was only willing to use its powers to award the landlord a provision requiring the tenant to return the premises to the landlord with the same EPC rating as it had at the start of the lease.
Implications for landlords and tenants
Whilst the decision in Clipper is of the lower courts and therefore not binding, landlords should be cautious when seeking to use the 1954 Act lease renewal process to impose green lease provisions in any new lease and instead seek to crystallise those in the lease negotiations.
Likewise, in the case of tenant alterations, the impact of those alterations negatively impacting an EPC and required restrictions, should be addressed in the licence for alterations.
What does the future hold?
Now the 1 April 2023 date has passed, and we are looking at further changes to the minimum requirements in the future, what is "fair and reasonable" in terms of environmental and sustainability provisions may well change over time as these types of provisions become more prevalent in new leases. Other factors for example, the nature of the property (i.e. industrial versus high class office) and its existing rating may also play a part in determining what provisions would be deemed "fair and reasonable" to include in a renewal lease. This is something that both landlords and tenants should keep under review and can expect to be contended for some time to come.
If you are a commercial landlord or tenant impacted by the changes to EPC ratings on commercial properties or, you have any concerns or queries about how these issues may impact you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies' contact.
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