Commercial Property - Energy Focus

The huge increase in energy costs combined with global threats to energy security have encouraged many businesses to focus on improving the environmental performance and energy efficiency of their buildings. Such improvements may extend from relatively minor works such as the installation of energy efficient lighting, through improvements to insulation and heating systems, up to significant renewable energy projects such as the installation of wind turbines or solar panels.

The adoption of such measures becomes more complicated with regard to commercial property that is leased to a tenant. The tenant may only have a relatively short term interest in the property and therefore be reluctant to incur costs for improvements that may only pay off over the longer term, whereas there may be no immediate benefit to the landlord as any improvements in energy efficiency may only benefit the tenant through lower energy costs in the short term (as in the vast majority of leases the tenant will be responsible for the cost of utilities consumed in the property).

In a previous edition of this newsletter, we looked at "green leases" and the introduction of clauses to leases (or side agreements) that focus on improving the environmental position of a building. Many of the current "green" lease clauses set out the intentions of the landlord and the tenant to cooperate and act reasonably with regard to proposed energy improvements, mainly stopping short of hard, certain obligations (particularly on the part of landlords) to take any particular action. It remains to be seen how far this area will develop into clear, enforceable obligations on either party, or how disputes will be resolved in the event of a party alleging that the clauses have not been complied with. For example, a proposal to install solar panels on the roof of a building will often require compromise and a departure from the existing lease terms - the landlord may wish to install solar panels on a roof area that is already let to the tenant, or the tenant may offer a proposal for the installation of solar panels that requires a lease of roof space for a term that extends beyond the expiry of the tenant's own lease. In such a scenario, if either party is able to simply make out that other competing interests override their green obligations in the lease (say, in the case of the tenant to enjoy the roof space free from the solar panel equipment, or in the case of the landlord to not be left with the panels on the roof after the tenant has vacated), then the real value of such clauses is called into question (beyond window dressing).

With regard to Minimum Energy Efficiency Standards (MEES), the fact that the minimum requirement of an Energy Performance Certificate 'E' rating will apply to existing commercial leases from 1 April 2023 (not just on the grant of a lease) is significant, particularly as the penalties for non-compliance fall on the landlord. Tenants with proposals for energy efficiency improvements to their building should find that landlords are receptive to such proposals, particularly if the current energy efficiency standard of the building is poor.

The issue of the energy efficiency of buildings is not going to go away and the direction of travel is clear. Whilst such steps may seem more obviously attractive to owner occupiers, the financial incentives are there in respect of leased property too (for tenants in terms of reduced energy costs, and for landlords to avoid penalties and to have more attractive and potentially more valuable buildings). Co-operation and engagement between the parties is key, to ensure that any measures taken comply with lease terms and any necessary variations to terms or required consents are dealt with prior to undertaking works.