Extending the Landlord's right to do works
Statement of Intent
The Lease contains provisions to avoid paralysis of the Environmental Performance/EPC rating of the Premises and the Building during leases (and these may affect the tenant consent MEES Exemption) as follows:
- The Landlord to have some right to carry out improvement works to the demised premises if this is possible without material adverse impact on the tenant’s occupation;
- Support (but no drafting) for a cost contribution from the Tenant to the extent of resulting savings;
- Landlord not to be liable for interruption to services caused by works to common parts/equipment due to works to improve Environmental Performance/EPC rating but L to use reasonable endeavours to minimise any disruption/interference.
Preamble
This clause is designed to deal with a situation where a landlord and the relevant tenants in the Building cannot agree on the works to be done to improve Environmental Performance or the EPC Rating of the Building or the Premises, yet the Landlord wishes to do works which will Improve the Environmental Performance. These may be works in the Common Parts to plant and equipment serving the whole Building or only one particular part (for example, a replacement boiler), or even works within the Premises. The BBP considers that it is important for the Landlord to have the option (but no obligation) to carry out such works unilaterally so that action can be taken to Improve the Environmental Performance or the EPC Rating of the Building or Premises during the term of a lease given the urgent need to reduce greenhouse gas emissions over this decade.
Landlords should be aware however that use of this clause in a form which provides landlords with an absolute right to carry out such works in the Premises (or where there would otherwise be restrictions on its ability to carry out works to the Common Parts) will mean that the Landlord cannot use a lack of the Tenant's consent to rely on the “consent” exemption from compliance with the minimum energy efficiency standards required by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 as amended (“ the MEES Regulations”). Where the clause used makes the Landlord’s right to do works conditional on Tenant’s consent which cannot be unreasonably withheld, if the Tenant withholds consent unreasonably, it may also not be possible to rely to rely on the “consent” exemption. It should however be noted that even where the Landlord does not reserve rights to do works which will Improve the Environmental Performance, in order for the consent exemption to apply the Landlord will need to have made reasonable efforts to obtain necessary third-party consents (including the Tenant’s consent) to do relevant works. Whatever the wording of the lease the Tenant and other relevant third parties may in response provide consent in which event the exemption will not apply.
Further information about the MEES Regulations is in Appendix 1 and advice should be sought where necessary.
The draft clause does not seek to deal with the costs of such work. The issue of landlords bearing the costs of Improvements to the Environmental Performance of buildings without any ability to recover all or part of the costs of these works whilst tenants enjoy cost savings as a result of the works has been referred to as the “split incentive” and is seen as an obstacle to such improvement works. Increasingly the parties’ interests are aligned and both are equally concerned to Improve the Environmental Performance, particularly the energy efficiency of the Building and the Premises for cost saving and climate change mitigation reasons. If the works will result in cost savings by way of reduced energy or other utility costs for the Tenant, the BBP considers that it is reasonable for the Tenant to contribute to the costs of the works to the extent that it will enjoy cost savings. How this is achieved should be a matter for agreement between the parties.
Where the works are to the Premises then the costs of these are unlikely to be recoverable under a service charge and consideration should be given to including any cost recovery arrangement agreed by the parties in this clause entitling the Landlord to carry out these works.
There are a number of international examples of cost recovery principles in this context.
The Australian BBP (BBP Leasing Standard Template Clauses | Better Buildings Partnership) includes a provision that the Tenant will contribute to the cost of relevant improvements provided this contribution “ does not exceed a reasonable estimate of the cost savings to be made by the Tenant as a consequence of the works".
The Green Lease Leaders initiative in the US https://www.greenleaseleaders.com/wp-content/uploads/2022/02/Green-Lease-Leaders-Landlords-Reference-Guide-FINAL.pdf seeks to recognise via a ratings system landlords and tenants who have implemented energy efficiency in leased spaces. It suggests the following clause to deal with cost recovery of improvement works: “Landlord may include the costs of certain capital improvements [intended to] [that] improve energy efficiency in operating expenses of tenant space. The amount passed through by the Landlord to the Tenant in any one year must not exceed the prorated capital cost of that improvement over the expected life cycle term of that improvement [and must not exceed in any year the amount of operating expenses actually saved by that improvement]. Interest/the cost of capital can be included.”
The Energy Aligned Clause (eac_overview.pdf (nyc.gov)) developed at the instigation of the City of New York in 2010 to solve the split incentive obstacle follows similar lines but restricts annual recovery from tenants to 80% of predicted energy cost savings to provide a buffer for the Tenant against underperformance of the works (+/- 20% against predicted savings was found to be the norm based on industry experience).
The Institute for Market Transformation in the US has published Green Lease Language Examples - IMT which include a number of examples of cost recovery clauses for the cost of improvement works.
The BBP is continuing to explore ways in which the costs of works which Improve the Environmental Performance of the Premises can be shared in a way which is fair for both parties.
Gearing up for your Green Lease Journey
Light Green Clause:
Accelerating your Green Lease Journey
Medium Green Clause:
Driving Transformation with your Green Lease Journey
Dark Green Clause:
Suggested Drafting
Light Green Clause
The Landlord is entitled to enter the Premises to carry out [at the Landlord’s expense] works intended to Improve the Environmental Performance of the Premises [and the Building] or improve the EPC Rating [or any Environmental Rating] of the Premises [and the Building] where the Tenant consents.
The Landlord is entitled to carry out works to the [Common Parts][ and the Building Management Systems], which are intended to Improve the Environmental Performance of the Building or improve the EPC Rating or any Environmental Rating of the Building notwithstanding any interruption in the provision of services by the Landlord provided always that the Landlord must use reasonable endeavours to minimise any disruption to the Tenant and any interference with [services][the Services] it has covenanted to provide.
Drafting note
The Landlord must (on a case by case basis) consider whether the works or the way they are carried out are so extensive or disruptive that they could be a derogation from grant or a breach of the Landlord’s quiet enjoyment obligation in the lease. Both of these provide important safeguards for tenants concerned about disruption to their business caused by any work a landlord may carry out under this clause. In addition the MCL includes protection for tenants including:
- Clause 2.4.8 implies that where the consent or approval of a party is required that consent or approval will not be unreasonably withheld or delayed; and
- Clause 5.5 of the MCL includes extensive entry safeguards which the Landlord must observe when entering the Premises including an obligation to give notice, to cause as little interference to the Tenant’s business as reasonably practicable, to cause as little physical damage as reasonably practicable and to make good any damage caused. It also includes a requirement for tenant approval to the location and other aspects of the works. Landlords should be aware of this and might want to consider whether aspects of this should be amended if they create obstacles to Improving the Environmental Performance.
This clause can be added in its entirety to the Sustainability schedule (Schedule 7) of the MCL in which case paragraph 3.3. of part 2 of Schedule 1 of the MCL should be deleted or, the first paragraph could be added to the rights of entry at paragraph 3.1. of part 2 of Schedule 1 and the second paragraph could be added to paragraph 4 of part 2 of Schedule 1 of the MCL. Depending on any provisions for costs included in this clause, clause 4.6.3 of the MCL should be deleted.
Generally, the Landlord would be free to carry out improvement works to the Common Parts or Building Management Systems without restriction, because nothing in the lease prohibits what it does to its parts of the Building. However, where the Landlord is obliged to provide services, carrying out the improvement works may interrupt this in a manner that is not authorised by the lease. In such circumstances the last part of this clause will permit the Landlord to do the work notwithstanding the interruption to services. Paragraph 4.1 of part 2 of Schedule 1 of the MCL allows the Landlord to close off or restrict access to the Common Parts provided an alternative is provided.
This version of the clause requires the Tenant’s consent (not to be unreasonably withheld). This would allow refusal of consent, where reasonable, on wider grounds than whether or not the works would Improve the Environmental Performance or the EPC Rating. The clause avoids giving the Tenant absolute discretion in providing its consent or requiring the Tenant to bear the whole cost of works to the Building or Premises if such consent is given. Such an approach does not best ensure a Landlord will be able to carry out works or that a Tenant will consent to works. If the Tenant consents to the works, it will remove any exemption from any required MEES compliance based on Tenant consent, in respect of any elements of work necessary to improve the EPC for the Premises or the Building. If other third-party consents would still be required for the work and could not reasonably be obtained the consent exemption would still apply in relation to the proposed work. If the Tenant reasonably refuses consent, then to the extent the works to the Premises are required to achieve the minimum EPC Rating for lawfully letting the Premises, the consent exemption can be relied on.
As stated above the BBP considers that it is reasonable for the Tenant to contribute to the costs of the works to the extent that it will enjoy cost savings.
Medium Green Clause
The Landlord is entitled to enter the Premises to carry out [at the Landlord’s expense] works intended to Improve the Environmental Performance of the Premises [and the Building] or improve the EPC Rating or any Environmental Rating of the Premises [and the Building] which the Tenant acting reasonably and without delay agrees would Improve the Environmental Performance of the Premises [or the Building] or improve the EPC Rating [or any Environmental Rating] of the Premises [or the Building].
The Landlord is entitled to carry out works to the [Common Parts][and the Building Management Systems], which are intended to Improve the Environmental Performance of the Building or improve the EPC Rating or any Environmental Rating of the Building notwithstanding any interruption in the provision of services by the Landlord provided always that the Landlord must use reasonable endeavours to minimise any disruption to the Tenant and any interference with [services][the Services] it has covenanted to provide.
Drafting Note
The Landlord must (on a case by case basis) consider whether the works or the way they are carried out are so extensive or disruptive that they could be a derogation from grant or a breach of the Landlord’s quiet enjoyment obligation in the lease. Both of these provide important safeguards for tenants concerned about disruption to their business caused by any work a landlord may carry out under this clause. In addition the MCL includes protection for tenants including:
- Clause 2.4.8 implies that where the consent or approval of a party is required that consent or approval will not be unreasonably withheld or delayed; and
- Clause 5.5 of the MCL includes extensive entry safeguards which the Landlord must observe when entering the Premises including an obligation to give notice, to cause as little interference to the Tenant’s business as reasonably practicable, to cause as little physical damage as reasonably practicable and to make good any damage caused. It also includes a requirement for tenant approval to the location and other aspects of the works. Landlords should be aware of this and might want to consider whether aspects of this should be amended if they create obstacles to Improving the Environmental Performance.
This clause can be added in its entirety to the Sustainability schedule (Schedule 7) of the MCL in which case paragraph 3.3. of part 2 of Schedule 1 of the MCL should be deleted or, the first paragraph could be added to the rights of entry at paragraph 3.1. of part 2 of Schedule 1 and the second paragraph could be added to paragraph 4 of part 2 of Schedule 1 of the MCL. Depending on any provisions for costs included in this clause, clause 4.6.3 of the MCL should be deleted.
Generally, the Landlord would be free to carry out improvement works to the Common Parts or Building Management Systems without restriction, because nothing in the lease prohibits what it does to its parts of the Building. However, where the Landlord is obliged to provide services, carrying out the improvement works may interrupt this in a manner than is not authorised by the lease. In such circumstances the last part of this clause will permit the Landlord to do the work notwithstanding the interruption to services. Paragraph 4.1 of part 2 of Schedule 1 of the MCL allows the Landlord to close off or restrict access to the Common Parts provided an alternative is provided.
The light green version of this clause means the Landlord can only carry out the works with the Tenant’s consent which is not to be unreasonably withheld. So, the Tenant could accept that the works Improve the Environmental Performance of the Building but still withhold consent for other reasons. The medium green version means that the Tenant can only withhold consent if it does not agree that the works will Improve the Environmental Performance of the Building. If it does accept this it can’t withhold consent for any other reason.
If the Tenant agrees that the works will Improve the Environmental Performance of the Premises or the Building then the Landlord would be entitled as against the Tenant to do the works. Unless other third-party consents would still be required and could not be obtained for the work, the MEES consent exemption would not apply in relation to the proposed work.
As stated above the BBP considers that it is reasonable for the Tenant to contribute to the costs of the works to the extent that it will enjoy cost savings.
Dark Green Clause
The Landlord is entitled to enter the Premises to carry out [at the Landlord’s expense] works intended to Improve the Environmental Performance of the Premises [and the Building] or improve the EPC Rating [or any Environmental Rating] of the Premises [and the Building].
The Landlord is entitled to carry out works to the [Common Parts] [and the Building Management Systems], which are intended to Improve the Environmental Performance of the Building [and/or the Premises] or improve the EPC Rating or any Environmental Rating of the Building [and/or the Premises]notwithstanding any interruption in the provision of services by the Landlord provided always that the Landlord must use reasonable endeavours to minimise any disruption to the Tenant and any interference with [services][the Services] it has covenanted to provide.
Drafting Note
The Landlord must (on a case by case basis) consider whether the works or the way they are carried out are so extensive or disruptive that they could be a derogation from grant or a breach of the Landlord’s quiet enjoyment obligation in the lease. Both of these provide important safeguards for tenants concerned about disruption to their business caused by any work a landlord may carry out under this clause. In addition the MCL includes protection for tenants including:
• Clause 2.4.8 implies that where the consent or approval of a party is required that consent or approval will not be unreasonably withheld or delayed; and
• Clause 5.5 of the MCL includes extensive entry safeguards which the Landlord must observe when entering the Premises including an obligation to give notice, to cause as little interference to the Tenant’s business as reasonably practicable, to cause as little physical damage as reasonably practicable and to make good any damage caused. It also includes a requirement for tenant approval to the location and other aspects of the works. Landlords should be aware of this and might want to consider whether aspects of this should be amended if they create obstacles to Improving the Environmental Performance.
This clause can be added in its entirety to the Sustainability schedule (Schedule 7) of the MCL in which case paragraph 3.3. of part 2 of Schedule 1 of the MCL should be deleted or, the first paragraph could be added to the rights of entry at paragraph 3.1. of part 2 of Schedule 1 and the second paragraph could be added to paragraph 4 of part 2 of Schedule 1 of the MCL. Depending on any provisions for costs included in this clause, clause 4.6.3 of the MCL should be deleted.
Generally, the Landlord would be free to carry out improvement works to the Common Parts or Building Management Systems without restriction, because nothing in the lease prohibits what it does to its parts of the Building. However, where the Landlord is obliged to provide services, carrying out the improvement works may interrupt this in a manner than is not authorised by the lease. In such circumstances the last part of this clause will permit the Landlord to do the work notwithstanding the interruption to services. Paragraph 4.1 of part 2 of Schedule 1 of the MCL allows the Landlord to close off or restrict access to the Common Parts provided an alternative is provided.
This version of the clause gives the Landlord the absolute right (subject to derogation from grant) to carry out works to the Premises and the Common Parts to Improve the Environmental Performance of the Premises or the Building (as appropriate) and on the basis it is an absolute right it is categorised as "dark green" in that it secures the right to Improve the Environmental Performance without the need for Tenant’s consent. As the clause does not require the Tenant’s consent to the works, it will remove any exemption from any required MEES compliance based on the Tenant’s consent, in respect of any elements of work necessary to improve the EPC for the Premises or the Building (as appropriate). If other third-party consents would still be required for the work and could not reasonably be obtained the consent exemption would still apply in relation to the proposed work.
As stated above the BBP considers that it is reasonable for the Tenant to contribute to the costs of the works to the extent that it will enjoy cost savings. However, where the parties cannot agree a contribution by the Tenant then the Landlord should have the right to carry out improvement works to the Premises if it wishes to (subject to the entry protections in the MCL and usual derogation from grant protection for the Tenant). The lease should be checked to see whether it already contains sufficient rights to enable the Landlord to review and measure in this way, or to carry out such improvements.
This version of the clause could be more specific if the Landlord and the Tenant agreed the works and the apportionment of the cost of the works and included provisions to reflect that agreement in the lease.