With increasingly demanding climate-related regulations, many buildings will require energy efficiency improvements. Whilst environmental and sustainability considerations can be addressed when negotiating new commercial leases, it can be much harder to deal with these issues during a lease renewal.
Many in-house legal teams will need to know whether or not your current lease has security of tenure under the Landlord and Tenant Act 1954 (1954 Act). This may be a significant factor when it comes to negotiating the terms of your renewal.
From a tenant’s perspective, you may be in a stronger bargaining position to resist a landlord’s attempt to pass on additional costs of new energy efficiency measures if your lease is a “protected 1954 Act” lease.
Mark Reading provides a quick guide for in-house legal teams on what scope there is to modernise commercial leases by inserting “green lease” terms on renewal.
What are green lease terms?
Green lease provisions generally aim to reduce the environmental impact of premises. These clauses might, for example, govern:
- Installation of Utility Meters: Ensuring accurate measurement of energy usage.
- Sharing of Energy Consumption and Environmental Data: Promoting transparency and accountability.
- Waste Reduction, Management, and Recycling Commitments: Encouraging sustainable waste practices.
- Use of Sustainable Materials for Repairs: Prioritizing eco-friendly materials.
- Water Efficiency Measures: Implementing strategies to conserve water.
- Energy Performance Levels: Requiring tenants to maintain or improve minimum energy performance.
These provisions are sometimes described as “light,” “medium,” or “dark” green, depending on their stringency and enforceability:
- Light Green Provisions: Set out general principles that may not be binding.
- Medium or Dark Green Provisions: Contain specific and enforceable obligations.
Is there scope to update leases on renewal?
Scope for lease updates
Under the 1954 Act, if you occupy premises for business purposes, you will have “security of tenure,” subject to certain exceptions. This means you have the right to remain in the premises when your current lease ends. You also have the right to request a renewal lease instead of having to leave. This is the case unless the landlord can successfully oppose renewal on certain statutory grounds.
Contracting out
The 1954 Act, however, allows prospective landlords and tenants to “contract out” of the security of tenure provisions. This is by following a set procedure, meaning the tenant will have no right to remain in the premises at the end of the lease or to request a new tenancy.
Negotiation considerations
Whether or not a lease has security of tenure, it provides an important starting point for negotiations when your tenancy comes up for renewal.
Court determination
If the current lease has security, the court will determine the terms of the new tenancy in accordance with the 1954 Act, if the parties cannot agree on them. Any negotiations are therefore carried out against that background, knowing how the court will approach assessing the terms of the new lease. As a result, you will usually be in a stronger negotiating position than when renewing a contracted-out lease.
Contracted-out leases
If the lease is contracted out, then, unless there is a contractual option to renew, the landlord does not have to grant a new lease at all. If it is prepared to offer a new lease, negotiations will effectively be on an open market basis.
Existing occupancy
In both cases, the parties aren’t starting entirely from scratch because you’re already occupying the premises. Adding green lease clauses into any renewal lease will often be harder than doing so when letting empty premises for the first time.
Cost of compliance
Very often, the key consideration will be who should bear the cost of complying with the new provisions, particularly where this might involve carrying out environmental works.
How likely is it for “green lease” provisions to be accepted by the courts?
The 1954 Act dictates how the court will determine the premises, duration, and new rent. It also covers ‘other terms’ of the new tenancy when parties cannot agree.
When the court sets the “other terms” of a lease, it usually starts with the terms of the existing lease. The court can change those terms, but only if the party requesting the change can prove that it is justified, fair, and reasonable.
This creates a challenge when the existing lease does not include green lease provisions. In such cases, it becomes much harder to insert new environmental terms.
So far, there have been very few cases where courts have considered adding green clauses to a new lease. In the cases that do exist, the courts have chosen not to allow them.
Recent example of a 1954 Act renewal
In one recent case, the landlord sought to include obligations in the new lease. These would prevent the tenant from alterations that would put the landlord in breach of its statutory obligations under minimum energy efficiency standards (MEES) regulations.
The court refused to include the clauses the landlord wanted. This decision was on the basis that they weren’t in the existing lease, and the landlord should not shift the burden of the MEES regulations onto the tenant.
However, it did allow one provision requiring the tenant to return the premises at lease expiry with the same energy performance rating.
What about opposed 1954 Act renewal claims?
One of the grounds on which a landlord can oppose renewal is where it intends to:
- Demolish or reconstruct the premises, or carry out substantial works of construction;
- At or shortly after the end of the current tenancy; and
- Cannot reasonably do this without having possession
This is known as the redevelopment ground.
This presents a challenge because the works may not involve demolition, reconstruction or construction. For instance, this will not cover all energy efficiency measures, such as:
- Retrofitting offices to improve insulation
- Replacing older heating systems
- Installing lighting controls
If your landlord wanted to complete such works, these may not fall within the required categories of substantial reconstruction or construction. The landlord may not therefore be able to rely on the redevelopment ground to recover possession and carry out such energy improvement works.
Is there potential for reform?
As it stands, the 1954 Act doesn’t promote energy efficiency measures either during lease renewal, or when landlords want to upgrade buildings without carrying out a wholesale redevelopment. This is unsatisfactory to say the least.
On 19 November 2024, the Law Commission launched a consultation into how the 1954 Act is working. The first stage of the consultation focuses on whether security of tenure still serves any purpose at all. However, it’s possible that reforming the 1954 Act to better support energy efficiency improvements will be considered at stage two.
This article is written by Mark Reading, Property Litigation Partner, Mishcon de Reya
Crafty Counsel is the UK’s most dynamic and fast-growing legal Community. With members from across the globe, the Community is a hub for sharing experiences, learning together, and forming invaluable connections. Join for free to access the Community Hub App.