MEES makes it unlawful to let (and from April 2023 to continue to let) a property with an EPC rating below an E, subject to certain exemptions.
In the recent case of Clipper Logistics Plc v Scottish Equitable Plc , the County Court has considered lease provisions seeking to protect the landlord from the risks associated with MEES. Has this judgement resulted in a suitable compromise position to balance the objectives of both parties?
The lease provisions in question:
- Prohibited the tenant from carrying out any alterations that would result in the property being designated as "sub-standard" under the MEES Regulations (i.e. with an EPC rating below an E); and
- Required the tenant to undertake remedial works to the property if any alterations did result in the property being designated as such.
The provisions were being considered under section 35 of the Landlord and Tenant Act 1954, which allows the Court to determine other terms of a new tenancy with "regard to the terms of the current tenancy and to all relevant circumstances".
The landlord's argument was based on a concern that the EPC rating for the property could be lowered by the tenant, placing the landlord in breach of MEES and leaving it with the cost of remediating the property. Whereas the tenant argued it should not be required to bear the burden of compliance with MEES as this compliance should fall to the landlord. Legislation places compliance with the property owner but landlords are known to try and pass such compliance down the chain to tenants.
The judge sided with the tenant and rejected the proposed provisions. Whilst sympathetic to the landlord's concerns, it was felt there was no reasonable need for these provisions on the basis the lease contained a prohibition on structural and external alterations and a qualified covenant in respect of other alterations. These provisions were deemed sufficient to prevent any alterations that may affect the EPC rating of the property.
However, the judge did suggest that a covenant requiring the tenant to return the property to the landlord with the same EPC rating as at the start of the lease would be acceptable and strike a balance between the parties' objectives.
Whilst this decision is not binding, we are seeing an increasing number of landlords seeking to include the aforementioned provision in lease negotiations.
Well-advised tenants would be wise to resist such a provision as it has potentially costly implications. Due to advances in technology, the EPC rating may naturally reduce during the term of a lease and the tenant risks being left with a capital outlay to increase the EPC rating from which the landlord receives all the benefit.
Alongside qualified alterations covenants, the landlord is able to further alleviate its concerns by including suitable access rights to make relevant energy efficiency improvements. Modern commercial leases will also permit the landlord to enter the property and remedy any breaches of the lease, which would include any alterations made by the tenant that affect energy efficiency.