The Green Agenda and Lease Renewal conundrum Opinion: John Eden

Everchanging government legislation and goalpost moving to hit net zero targets by 2050, has resulted is a minefield for commercial property, with landlords and tenants setting strict ESG mandates.

Achieving these aims may require extensive work like: installation of energy monitoring equipment; formulating  fit-out specification, and having the ability to carry out works, even if in the tenant’s demise.

If a unit is let to a new tenant, the landlord can strip back to shell, install energy efficient equipment, and set mandatory ‘green’ tenant obligations in the lease. However, if renewing a protected tenancy, it is not straight forward as it is typically assumed at renewal the new lease will be on same terms, subject to ‘reasonable modification’. It can be argued that any new ‘green’ clauses exceed reasonable modification.

As the tenant will have already fitted out their premises it may be:

1. Not possible for landlord to install new equipment within their demise
2. Deemed unreasonable to alter fit-out specification due to cost

Landlord rights to carry out works may impact tenant trade, affect security protocols, and impact future dilapidation negotiations at the end of the term.

Tenants often have their own ‘environmental commitments’ which may only be achievable subject to extensive works that may be within their demise, and at substantial cost.

Legislation is putting more pressure on the landlord to carry out such works at their own costs, but they could argue any improvement should be reflected in rent payable, or a contribution from the tenant.

How to resolve negotiations?

To date there has been limited Court cases to set a precedent on this issue, so any decision will be entirely subjective to the judge.

In a County Court case, between Clipper Logistics Plc v Scottish Equitable Plc, the landlord tried to make any tenant alterations dependent on retaining the same level of EPC. The court deemed this an unreasonable requirement as most obligations in EPC legislation are the responsibility of the landlord. It is likely future court decisions fall in the tenant’s favour and the onus may fall solely on the landlord, for future ‘green commitments’ in real estate.

To help avoid delays and unnecessary expenditure, GCW informs the adverse party of any ‘green obligations’ the client may wish to enforce from the outset, to try and resolve any key issues at an early stage.

Once the lease is in legals, GCW continue to engage with solicitors in case a commercial solution needs to be found. The best advice can then be given to the client, on both a legal and a professional basis.

Resolutions based on our advice have included:

• Documenting side letters allowing for obligations to apply if a lease is being assigned/sub-let
• Agreeing a cost agreement should works be carried out by either party
• Setting in advance what future works are required to avoid ambiguous clauses that may be subject to interpretation

From our experience, it is best to address all client’s obligations at an early stage in negotiations, rather than leaving it for solicitors to settle on their own. This will speed up completion and result in legal documents that protect clients both on a professional and legal basis, fundamentally easing the process towards improving sustainability in commercial property.

Renewing protected tenancies is not comparable to conventional lettings, and an entirely separate approach is often required when negotiating lease terms. This is where GCW’s expertise can advise both owners and occupiers, whether it be resolving green clauses or other specific terms within a lease.