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Energy Efficiency in leases - tenant considerations

08 November 2018
Real Estate
Energy efficiency is a hot topic for landlord and tenants of commercial premises. Although primarily a landlord concern following recent new law that has been introduced, tenants can use this as an opportunity to open negotiations with the landlord to get energy efficiency works done at their premises.

From April this year landlords can no longer grant a new lease or renew an existing lease if the premises do not achieve the minimum energy efficiency level; this is currently set as the premises having an Energy Performance Certificate (EPC) rating of E. From 1 April 2023, however, landlords cannot continue to let premises which do not achieve the minimum energy efficiency level; again this is currently set at an EPC rating of E but could change before 2023. This presents an opportunity for tenants of premises which currently have an F or G EPC rating whose leases will not expire until after April 2023 or who have leases with security of tenure that are due to expire before that date as the landlord will be obliged to carry out works to improve the energy efficiency of those premises. There are three key events at which tenants can open up discussions with the landlord surrounding the carrying out of these works before 2023. 

  1. Renewal

    The tenant may be able to negotiate a position whereby it carries out the necessary improvement works in return for a cash contribution from the landlord or a rent free period at the start of the new lease.  The advantage of this is that the tenant is able to carry out the works themselves without the disruption that could be caused to its business as a result of the landlord carrying out the works and they could also benefit from lower energy bills sooner. However, if the landlord is paying for the works then it will want them to be taken into account at rent review which could increase the rent. The landlord may also try to insert new provisions into the renewal lease restricting what alterations the tenant can carry out in the future if these would adversely affect the EPC rating.
  2. Alterations

    If the tenant is planning a refit of its premises then it could negotiate with the landlord to carry out any necessary energy improvement works itself at the same time at the landlord's cost. 

  3. Rent Review

    The tenant could at rent review argue that there should be no increase in the rent because the premises could not be lawfully let on the open market. This argument may not prove successful as there may be other provisions in the rent review clause in the lease which could provide the landlord with a counter-argument. In any event, it would open up the negotiations between the parties as to the carrying out of the necessary energy efficiency works to improve the EPC rating.

Rather than waiting for a key event such as the above to arise, tenants may wish to take the initiative now and approach landlords to discuss carrying out the necessary improvement work prior to 2023. Tenants could in this way get ahead of the curve and ensure that any works required are carried out when it suits them and at the landlord's cost. 

If you would like to discuss any of the above please contact Rachel Lawler.

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