Green leases and moves to improve energy efficiency

Concerns about the impact of climate change are beginning to affect all areas of business including business premises, which are responsible for a significant proportion of the UK’s overall energy use. 

The government has announced that it plans to tighten regulations on energy efficiency in rented property, requiring significant improvements by 2030.  Commercial landlords and business tenants will need to make sure their leases give energy efficiency a higher priority and set out who is responsible for energy efficiency measures and who will foot the bill.

“Green leases are being gradually introduced in response to new legislation and a desire both by landlords and tenants to make energy savings,” says Andrew Little commercial property solicitor at our Malton office, “although it isn’t always clear exactly what a green lease is.  In simple terms, a green lease is one which includes specific provisions to promote energy efficiency during the lease term.”

Minimum energy efficiency standards

The pace of change in the energy efficiency of commercial buildings is being driven by regulations.  Since 2018, it has been illegal to grant a new lease of a property unless it has an Energy Performance Certificate (EPC) rating of E or higher and all property currently let will have to meet that standard by 2023.  The latest proposal is to raise the minimum standard to an EPC rating of B by 2030.

What should green leases cover?

According to government data, 67 per cent of the energy businesses use goes on heating and cooling, ventilation, hot water and lighting, so this is where improvements will be required.  Leases will need to cover a range of practical issues, particularly a landlord’s right of access, alterations by tenants, service charges and collaboration on energy saving measures.

A landlord’s rights

The landlord will need rights to enter the property to assess energy efficiency and make necessary improvements.  These could range from low cost measures like changing lighting to full-scale replacement of heating and cooling systems.  The landlord may also want to install individual meters in a multi-let building, to allow energy costs to be allocated accurately.

Service charge

Most leases will allow the landlord to recover the cost of maintenance from tenants through a service charge but, upgrades and improvements are usually excluded.  Landlords and tenants may need to agree a different approach for new energy efficiency measures on the basis that tenants should benefit from lower energy bills.  Your solicitor can make sure that the service charge provisions reflect clearly what has been agreed.

Tenant alterations

A business tenant will need some flexibility to make alterations to the property, but it is vital for landlords to make sure that tenants do not inadvertently reduce the property’s energy efficiency rating as a result of alterations.  A green lease will typically give the landlord the right to refuse consent for any alterations that would adversely affect the property’s EPC rating.  In turn, the tenant may want the right to make alterations that improve energy efficiency.  Again, the key point is to make sure your solicitor reflects in the lease whatever has been agreed.

Working together

In the past, landlords and tenants have seen themselves on opposite sides but are beginning to move away from this view, towards a more collaborative approach.  For example, in a green lease, the landlord and tenant may agree:

• only to use sustainable materials in any works they carry out to the property;
• to adopt a sustainable waste management policy;
• to share data on use of energy and water; and
• to work together to make the best use of building management systems by limiting the hours during which heating and cooling systems operate.

As businesses adapt to more stringent standards for energy efficiency, commercial property will play a big part.  The rules on exactly what is required can be complex but getting good legal advice now will allow both landlords and tenants to manage the necessary changes and avoid nasty shocks along the way.

For further information, please contact Andrew Little in the Commercial Property Team on 01653 692247 or email andrew.little@pearslaw.co.uk