Energy covenants proposed by landlord as part of lease renewal are rejected by Court

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A recent property litigation case involved the re-negotiation of terms of an expired lease under the Landlord and Tenant Act 1954. Some changes were agreed upon between the landlord and tenant pre-trial but other aspects of lease terms were left to be determined by the County Court, including the ‘alterations’ clause.

In Clipper Logistics Plc v Scottish Equitable Plc, the landlord called for three covenants to be introduced to the lease. These were:

  • a Prohibition Clause to prevent alterations resulting in the property’s Energy Performance Certificate (EPC) grade falling below Band E and thus rendering the property ‘sub-standard’
  • an Indemnity Clause against the cost of a new EPC certificate in the event that such alterations were made to the property
  • A Reinstatement Clause requiring the tenant to maintain the current EPC rating throughout their tenancy, and to do this by implementing remedial works if necessary.

It was determined that the party requesting the changes (the landlord in this case) would be required to persuade the Court of its arguments for doing so and that any proposed changes must be both fair and reasonable.

The Court noted that the majority of obligations relating to energy performance and efficiency regulations reside with the landlord rather than the tenant and that, when considered together, the proposed covenants would unfairly and unreasonably shift the burden of these duties onto the tenant.

Specifically, the Court held that the proposed Prohibition Clause was unnecessary as the existing lease already contained terms preventing the tenant from making alterations to the property, and that it would be too burdensome for the tenant to adhere to the Indemnity Clause.

In favour of the landlord, on the other hand, the Court held that the requirement in the Reinstatement Clause for the tenant to return the property with the same EPC rating as when it took over the lease should be implemented. By doing so, this would have the effect of protecting the landlord against any potential inaction from the tenant which might render the property as ‘sub-standard’. However, the Court rejected the rest of the Reinstatement Clause terms as again being unreasonably burdensome on the tenant and putting the landlord in a position of unfair advantage.