Green lease terms: Court’s approach on 1954 Act renewal

27th May 2022

Why is Clipper Logistics v Scottish Equitable of interest?

With the UK aiming to achieve Net Zero by 2050, the past few years have seen the introduction of a variety of reforms, policies and initiatives to assist in the decarbonisation of the economy. Within the property sector specifically, there has been a notable increase in the number of ‘green’ lease terms proposed within new leases as well as lease renewals. The recent case of Clipper Logistics Plc v Scottish Equitable Plc [1] is of interest as it should help landlords, tenants, managing agents and legal advisers to understand how the court may approach green lease terms in lease renewal proceedings brought under the Landlord and Tenant Act 1954 (the 1954 Act).

What practical advice arises?

The courts are aware of and appreciate the heavy burden imposed on landlords by the existing Minimum Energy Efficiency Standards (MEES) regulations. However, as more landlords look to improve the energy efficiency of their properties, this case suggests that the courts may not tolerate landlords’ attempts to offload their green liability where that would impose new and additional burdens on tenants.  Additional tenant’s obligations proposed in a lease renewal must be considered by the court to be ‘fair and reasonable’ in the circumstances of the case.

What happened in the particular case?

Following expiry of the 1954 Act lease of the premises in question, the landlord and tenant started the process of negotiating terms to be included within the renewal lease. The court was asked to determine a number of remaining clauses on which the parties had failed to agree. These included the following alteration covenants, which the landlord sought to include:

• Prohibition of tenant alterations where such would lead to the property having an energy performance indicator below band E, such that the property would be considered “Sub-Standard” (the Prohibition Clause)

• An indemnity for the cost of a new EPC certificate in the event that the tenant or any other occupier were to make such alterations (the Indemnity Clause)

• An obligation on the tenant to maintain the current EPC rating, return the premises to the landlord with the same EPC rating, and promptly carry out remedial works to restore the EPC rating if it were to fall (the Reinstatement Clause).

Following the approach set out in the leading case of O’May v City of London Real Property Company [2], the court determined that it would be unfair to include the proposed obligations as they would impose unreasonable duties on the tenant beyond those included in the previous lease. The court highlighted that it is the landlord’s responsibility to comply with the MEES regulations, not the tenant’s.

The court did show some sympathy for the landlord, however, in that it permitted part of the Reinstatement Clause so that the tenant would be required to return the property with the same EPC rating as at the start of the lease. Without this, the court recognised that the landlord would not have the benefit of any real protection against inaction by the tenant.

It should be noted that Clipper Logistics v Scottish Equitable was a County Court decision. Whilst the decision may be indicative of the approach the courts are likely to take going forward, it does not act so as to bind them.

How we can help

Walker Morris’ Real Estate Litigation and transactional Real Estate teams are experienced and expert in acting for both landlords and tenants and will be happy to provide proactive strategic and practical advice in connection with any 1954 Act renewal or new commercial lease negotiations – both in terms of incorporating more environmentally-friendly green lease terms and generally.

Our teams are also well-versed in all aspects of alternative dispute resolution, including mediation and arbitration processes, and will be able to help resolve any lease-related disputes as and when they do arise.

If you have any queries in relation to the energy efficiency within your property portfolio and/or any commercial lease-related concerns, please do not hesitate to contact Lewis Couth or Paul Laverty.

[1] County Court, 2022, unreported

[2] [1983] 2 AC 726