The term ‘subject to modernisation’ is appearing more frequently in heads of terms for re-gears or variations of Scottish commercial leases. It is a sweeper clause for bringing an older lease into line with current market practice. What is envisaged by modernisation is not usually specified in the heads. Here we look behind that generality as to what could be included in modernisation.
What are common ‘modernisation’ provisions?
The most common modernisation provisions we are seeing are:
- Statutory and regulatory updates: Whilst leases will require tenants to comply with statute, including amendments or variations to existing statute, there may be new legislation which is not covered but should be. The most common example is including the Scottish EPC and action plan wording in older leases which pre-dated such provisions. Landlords (and their advisors) should be careful in reviewing this clause to ensure that all relevant legislation (including, insofar as possible, future legislation) has been captured.
- Uninsured risk provisions: These provisions regulating what happens when material damage or destruction occurs as a result of a risk which is not covered by the insurance for the building are now relatively standard in Scottish commercial leases. Older leases may, however, be silent or contain provisions which are no longer market standard. Uninsured risks should be precisely defined, and landlords must be careful to avoid inadvertently becoming responsible for all and any risks. Similarly, tenants will want to ensure that any carve outs in the lease which apply to insured risks also apply to uninsured risks. See more information on the topic of uninsured risks here.
- Tenant’s expiry obligations: As part of a lease modernisation, landlords may wish to have the option of retaining tenant‑installed improvements that enhance environmental performance. Retaining such improvements not only preserves the enhanced performance of the building but also reduces unnecessary waste and the environmental impact associated with stripping out functional, sustainable materials.
- Service charge:
- Tenants are increasingly expecting ‘end of journey’ facilities to be the norm in multi-let office or mixed use buildings e.g. bike racks, shower or locker rooms, gyms or other wellbeing areas. The provision of such areas is likely to be a landlord cap ex. However, the landlord would be looking to recover the cost of the ongoing management, insurance, maintenance and services etc for such areas (such as towels and toiletries, water fountains and the like) via the service charge. The existing lease service charge provisions may not be sufficient to catch such costs, so a prudent landlord would seek to incorporate such changes to leases as part of a re-gear.
- Where a landlord does not wish to incur the capital cost of new ESG measures it may be appropriate to include provisions in the lease allowing the landlord to install renewable technology or upgrade shared plant, with the associated costs recoverable through the service charge. This ensures the landlord can future‑proof the building and deliver required improvements while spreading the cost across the tenant base in line with standard service charge principles. The extent to which a tenant agrees to such provisions may be the subject of negotiation between the parties.
- Access for landlords: The landlords’ rights provisions may need updating to take account of ESG provisions, particularly enabling landlords to access the lease demise to review or monitor utility costs and energy / sustainability performance. Including clear access rights for this purpose ensures the landlord can track the effectiveness of sustainability initiatives and support reporting or regulatory compliance.
What about ESG and general green lease provisions?
These have become a central feature of modern commercial leasing and ‘green’ lease clauses are becoming increasingly market standard. These can range from general cooperation requirements to binding environmental obligations and can include:
- tenant obligations to maintain or improve energy efficiency in the property and to comply with environmental performance standards;
- requirements for tenants to share energy, water, and waste data to monitor building performance via electronic methods;
- restrictions or prohibition on tenant works throughout the duration of the lease that could negatively affect the building’s EPC rating or energy efficiency;
- tenant obligations to use sustainable materials, where economically viable, in respect of repairs, alterations, or tenant fit-out under the lease;
- with retail units, requirements on tenants to have green / environmentally sustainable / carbon reducing or carbon neutral supply chains;
- tenant obligations to comply with local waste management and recycling requirements; and
- tenant participation in building-wide environmental initiatives and targets.
What are the key takeaways for lease modernisation?
Re-gears of leases are good opportunities for both the landlord and tenant to reflect on the existing terms of the lease to identify any provisions which need updating. Such additional provisions and updates are usually included in heads of terms by a general statement that the lease will be ‘subject to modernisation’. Whilst that will necessitate a full review of the lease which can take time, agreeing the parameters of such modernisation at the re-gear heads of terms stage helps ensures that both landlord and tenant are aligned as to what will be introduced into the lease. That aids a smooth negotiation process, reduces the time to agree drafts and reduces the risk of disputes.
