From the 1st April 2018 it will be unlawful to grant a new lease of energy inefficient commercial or domestic properties in England and Wales. The new
regulations, which have no impact on sales, set out minimum energy efficiency standards (MEES) and in essence make it unlawful to grant a new lease of a property that has an energy performance rating of below E.
Fundamentally this seems like a landlord problem – the legal
an obligation to comply and the penalties of non-compliance fall at their door. However, the new rules will have ranging implications on both the grant of a new lease and, in certain cases, under continuing leases. For new leases the effect is obvious; for continuing leases the regulations will apply, for example, where a tenant benefits from a right to underlet. The burden will then fall on the tenant to ensure the property complies with MEES which could, in turn, have serious financial implications on the value of the underletting.
In negotiating new leases, MEES has the potential to be contentious, as the terms sought by the landlord in a new lease may attempt to shift the burden of compliance onto the tenant. Explicitly, this could be in the shape of passing the burden of work required to bring the property up to the minimum standard or passing the financial penalties onto the tenant. However, tenants should be wary of more subtle restrictions on their rights, such as onerous clauses requiring access to carry out improvement work related to MEES that could impact upon business.
Despite the scope for argument, MEES do not necessarily need to be a source of confrontation. Both landlord and tenant can benefit from the regulations where a co-operative approach is taken. On the one hand, a landlord should be pro-actively looking to ensure that the asset is protected against the rising thresholds of energy efficiency, the financial penalties associated with non-compliance and the reduction in value of buildings that do not comply with MEES. On the other hand, a tenant will benefit from reduced outgoings and better efficiency, while keeping in mind concerns addressed above should they have the ability to underlet. Existing tenants may, therefore, wish to harness a strong relationship with the landlord to achieve the benefits early compliance can bring.
While there is still plenty of time before the regulations come into force, many landlords are quite sensibly assessing the need for a proactive approach to evaluating and confronting the risk MEES present. It is also important that tenants are fully aware of these approaching restrictions, and the implications it could have on their new or existing lease. Only then can both parties make an informed decision and reap the benefits from such awareness in commercial negotiations.
Call Jason Sidney Trainee Solicitor on 01842 754151