Drafting Leases for MEES and ESG – time to collaborate?  

The minimum rating requirements for EPCs are of course likely to be tightened at some point within the next few years. The previously signalled requirements for an EPC rating of “C” or higher by 1 April 2027 and a rating of “B” or higher by 1 April 2030 were looking unachievable some while ago, and we’ve now heard from the Government that the proposed timelines for minimum EPC levels will be updated to allow “sufficient lead in time”, but it will happen eventually.  

While this lack of clarity is perhaps ever more reason for landlords to give some serious thought to the best medium/long-term approach to take with their new lettings, it could also be a trigger for the increasing number of tenants who are mindful of the impact on the environment of the physical estate that they occupy to think about what positive steps they can help to take now to leave a lighter carbon footprint.

Whatever can be achieved by the lease drafting will of course ultimately depend on the age and nature of the real estate – but as a landlord, what if, for example, you’re seeking to agree a 15-year term with a new tenant at your (somewhat “brown”, by your own admission) industrial estate, for which you have decent “D” rating on the EPC. What should you be thinking about?

Two points to consider are:

1. Future-proof lease drafting around sustainability, EPCs etc.:  There are various sources out there to help you, such as the Law Society’s model clauses, the Better Buildings Partnership’s Green Toolkit etc. A few points here:

• Some of the drafting is rather aspirational and would involve a level of environmental expertise on both the landlord’s and tenant’s side which is outside of normal letting costs expectations – by way of example, see the Law Society model clause drafting which references specific annexures to the Kyoto Protocol, and improvements which tenants might make to parts of the estate which are not even demised to them. Perhaps this can be used for the bigger HQ lettings, but it’s unlikely to form part of the regular letting landscape.  
• The commonly-adopted Model Commercial Lease (the MCL project was originally commissioned by the British Property Federation) contains provisions:  (a) which prevent the tenant from undertaking alterations or additions which would have a material adverse impact on the environmental performance of the unit (with the definition of “environmental performance” cast appropriately wide), and (b) which allow the landlord to enter the premises to carry out works to improve environmental performance (at the tenant’s cost), but only where the tenant consents to that in its absolute discretion (the reason for the tenant having absolute discretion being that this may allow the landlord to rely on a limited exemption in the MEES regulations, where it cannot obtain consent, but consider whether you need something that definitely allows access, because exemptions are time-limited, and 15 years is a long time).
• There needs to be some thought as to how the rent reviews in that 15-year lease are going to perform. As with any rent review, there are nuances to consider carefully – the MCL lease assumes that the premises may “lawfully be let to…any person” while other precedents use language like “may lawfully be used…by the willing tenant…”. An assumption of lawful letting seems to be the right way to go, particularly where you have a “D” rating, and you may perhaps need by the date of the first rent review (depending on the revised targets) a “C” rating in order to let lawfully. Or you may want to look at a more specific assumption that the building has the required EPC rating at the time, but then consider of course whether you should also assume that the hypothetical lease does not contain such a provision, since it may be considered onerous and result in a discount.
• The tenant’s ESG credentials and aspirations:  This could be an area where the parties can work with each other for mutual benefit – for a tenant with a “Net Zero” target (and now that’s going to be pretty much any tenant looking to accommodate more than just a handful of people), the operation of its real estate will play an important and very visible role in meeting its Net Zero target, and also in attracting the right kind of business partners and employees.

2. The tenant’s ESG credentials and aspirations:  

This could be an area where the parties can work with each other for mutual benefit – for a tenant with a “Net Zero” target (and now that’s going to be pretty much any tenant looking to accommodate more than just a handful of people), the operation of its real estate will play an important and very visible role in meeting its Net Zero target, and also in attracting the right kind of business partners and employees.

Maybe there’s scope for the tenant agreeing to take on responsibilities which under legislation may be directed at landlords rather than tenants? (Note here that a general lease obligation for a tenant to “observe statute” is not going to be enough to result in the tenant assuming responsibility for all statutory requirements – there will need to be a more overt agreement for the tenant to undertake all statutory duties and obligations which apply to the building.)

Or perhaps the parties can explore a mechanism for costs/responsibilities to be shared in pursuing the shared goal of a sustainable workplace, but something more robust than the “memoranda of understanding” about sharing data etc., which started out in a time when tenants were probably more sceptical about their landlords’ ambitions on environmental matters. But of course, it needs to be fair – tenants shouldn’t be paying the whole cost of keeping their buildings in top environmental form.    

The landlord-and-tenant relationship will always be a tense one, and we’ll never get away from that completely, but carefully considered shared environmental goals could increasingly form an important part of modern leasing practice.