Lease Modernisation and Green Clauses

Modernising Retail Leases: Operational, Legal and Environmental Considerations

In this episode of 'That Retail Property Guy,' host Gary Marshall discusses the changes in lease agreements over the past 25 years, including requirements for new clauses covering pandemics and environmental impact (so-called green leases). It emphasises the importance of careful negotiation and professional advice for tenants to navigate modern legal and environmental obligations, while recognising the 'like-for-like' assumptions of the 1954 Landlord & Tenant Act, and discussing where the boundary lies between lease-contract obligations and evolving legislative standards such as Energy Performance Certificates (EPCs) and Packaging responsibilities.

00:00 Introduction to Lease Modernisation

00:49 Pandemic Clauses and Lease Negotiations

01:39 Modernization and Legal Considerations

08:30 Environmental Impact and Green Leases

13:12 Sustainability snd Future-Proofing Leases

17:38 Conclusion and Final Advice

Packaging rules:

https://www.gov.uk/guidance/extended-producer-responsibility-for-packaging-who-is-affected-and-what-to-do

Never miss an episode! Follow and like That Retail Property Guy on your favourite podcast platform - available on Apple, Spotify, Amazon and more.

Find out more and message us on the podcast website

Go to ThatRetailPropertyGuy for more on Gary Marshall, Smarter Estates and the TRPG podcast. You can also check out the TRPG Blog for reading versions of key episodes.

For our niche 'Accounts Recoverable in Retail Property' business services, visit SmarterEstates

And find Gary and team on LinkedIn for regular updates and community info!

Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics relating to estate management from the perspective of a retailer as tenant. In this episode, let's discuss lease modernization with a specific focus on environmental matters. Modernization is when modern lease standards evolve compared to those of yesteryear. Over the last 25 years, many lease topics have changed, not just environmental impact. Retailers negotiate new leases with their landlords at both new acquisition stage and at lease renewal, and as they do so, they are applying the lessons learned from the evolution of business, even just over a relatively short period, perhaps just the length of a recently expired lease. For example, until 2020, nobody ever really thought of the need for a clause, specifically dealing with what happens in the event of a pandemic, but so-called pandemic clauses are now commonplace. Will the rent be suspended or discounted, or absolutely be demanded with no exception. It's essential for the tenant to know their position, their legal contractual standing during the COVID Lockdowns. Many tenants of business leases found themselves without an income, but still bound to pay the rent. One landlord in London's West End famously litigated against tenants during that period if they didn't pay on time. Other landlords, including notable large institutions, voluntarily offered their tenants rent-free periods with no penalty. Or clawback. These extremes are now often factored into modern leases just so everyone knows where they stand. For many professional surveyors and agents initial lease negotiations tend to focus on the usual points, the primes of the location, which might have shifted over a period of years. Or the length of the new lease term. There's a modernization argument that tenants prefer shorter leases because they allow flexibility and the opportunity for rents to go down, not to be ratcheted in an upward only manner, and that shorter leases drive lower liability sums on the balance sheet for IFRS. Or FRS compliance, but reflect on this point. The 1954 Landlord and Tenant Act, which protects the renewal rights of many business tenants, also kind of assumes that they will get a renewal based on the same terms as the old expired lease. This isn't an assumption that the tenant can modernize purely to their advantage. It has to be a matter of give and take of negotiation. Although admittedly, in some cases a tenant with a reasonable degree of brand leverage might fare better than an independent retailer. It's a case of swings and roundabouts. There isn't a hard and fast rule. Some modernizations might reflect changes in legislation. A newly should recognize changes in planning, use classes. Since September, 2020, an older lease might specify a use within Class A one, which used to be a wide ranging category for retail, but since 2020, that's been re-designated as Class E. Commercial business and service. This category covers shops, banks, offices, restaurants, and gyms. Other modernization might reflect changes in repairing obligations. In recent years, we've become aware of flawed building methods and poor materials like asbestos or high luminous cement, flammable cladding. So maybe new leases seek to exclude tenant liability for costly repairs to these materials. A photographic schedule of condition might be required or recommended to document the state of repair, the extent of known issues at the start of the lease in order to avoid dispute at later expiry. Oh, and don't forget the alienation provisions that might allow the tenant to assign or sublet in the future, and whether alterations are permitted and whether any of this needs landlord's approval. A modern lease should be very clear about what is allowed. Prohibited and whether the landlord's consent or approval can be withheld either absolutely or only reasonably few. There's a lot to think about, but eventually an instruction might be passed to the lawyers. These instructions are often based on the broad reaching heads of terms, but with none of the legalese. So this is where the real work begins when the tenant's lawyer and the estates team scrutinize the landlord's draft lease, all manner of other wording terms and topics come under the spotlight. A pet peeve for me is the effective date of an agreed break clause. In my humble opinion, agents and landlords and tenants and lawyers should really try not to agree. Break clause is to be on an anniversary. This is like agreeing an extra day, and it just adds confusion and risk and cost. Consider this. If the proposed lease runs for five years from the 1st of January, 2025, it'll expire on the 31st of December, 2029, not the 1st of January, 2030. It'll be five years, not five years in one day. So if we want to break at the end of the third year, it should strike on the 31st of December, 2027, not the anniversary date, which would be the 1st of January, 2028. We want three years, not three years in one day. This extra day could unwittingly have repercu repercussions for the tenant. For example, if the conditions of the break require that all periodic rent is paid up, then in theory that extra day might mean that an extra month or quarter just fell due simply because that day is the start of the next calendar month or modern quarter. Failure to pay could invalidate the break. It's just trouble waiting to happen, so avoid it. Don't agree. Breaks on anniversaries. You're not planning to celebrate a birthday you want out on the last day of a period, not the first day of the next one. Anyway, back to the plot. We look at new leases through the lens of lessons learned over recent years and of changes in the world around us. Whether that's business, operational, economic, environmental, or geopolitical. Hands up, who remembers Brexit? We need to consider changes in. Car use as drivers steer away, pardon the pun, from the internal combustion engine towards EVs, that's electrical vehicles. Of course, we're just adopting the modern terminology that wasn't so common 10 or 20 years ago. Many EV drivers have range anxiety, so EV charging points are very much a necessity. They don't have to be linked to an established infrastructure like old fashioned petrol filling stations did. So EV points can pop up like mushrooms, and a common opportunity is in car parks at shopping centers and retail parks. Great. We think. But what if the landlord plunks them right outside your store to the detriment of your customers, particularly those who don't drive EVs. These EV points become reserved spaces, which should be part of the common carpark. Is that for the greater good or just benefiting a minority? And what does the new lease service charge say about the income that these EV charging points generate? Who gets the benefit of that? Can the landlord keep it as an extra revenue stream, or should it feed into the service charge to reduce the cost of other management activities that usually just get passed onto the occupying tenants? If the car park is suddenly a cash cow, why shouldn't all the tenants benefit? What will the new lease say? Who is reading it closely enough to push back to say, Hey, this is out of order. And as we apply lessons learned? Should the service charge include a general cap that's a maximum payable? Should the cap be tenant specific or limited to a particular charge, like marketing or maybe putting a ceiling on the fees charged by the managing agent? Why should the managing agents get a blank check for their fees to be born by the tenants who might generally think they do a pretty poor job? There are many areas where modern leases can vary distinctly from leases of bygone years. As we discussed earlier, it can present a legal obstacle In the case of a lease renewal where the tenant is protected by the 1954 Landlord and Tenant Act, the 54 Act expects that the new lease will be more or less the same as the old lease. Any variation is an exception to the rule. A tenant can't demand a change, and likewise, a landlord can't simply impose it. If they can't agree, they can refer the pointing question to arbitration or to a court, but hopefully they'll work hand in hand trading off their desired modernization clauses being reasonable and reaching an acceptable compromise. Currently, there is a sea change in the area of environmental awareness. Modern leases might be labeled green leases for their focus on environmental performance, sustainability, and energy performance. I'm not suggesting that this is just virtue signaling by landlord and tenants, but tenants in particular should be wary of what they're signing up to. Burning fossil fuels to heat and light. Our commercial space is an easy and obvious target for green clauses. The government has introduced rules and regulations, but some landlords try to reach further or at least to anticipate what the government might think of next. We're all used to seeing energy performance stickers on electrical appliances, like fridges and washing machines. We search for machines labeled a or a plus, or a plus plus as being the most fuel efficient, the least planet harming, and the least expensive to run. But the same energy performance ratings also apply to commercial properties. These energy performance certificates or EPCs form part of the ME regulations, that's minimum energy efficiency standards. The minimum requirement for commercial property as at 2025 is Class E, but this will rise to Class C by 2027 and to class B by 2030. Landlords get twitchy about their EPC ratings for their properties and perhaps justifiably so they aren't allowed to grant in new lease. On a property which doesn't comply, remember at the moment, class E. So the last thing they want is the negative impact of an EPC at grade F or G, but landlords aren't completely in control of their EPCs. A new EPC is required if an occupier, which could be the tenant, makes some material alterations or undertake any deal, like an assignment or a subletting. So landlords are keen to make sure that tenants don't undermine. A cherished certificate at classy or above and can go so far as to propose clauses in modern leases, which purport to restrict a tenant from obtaining their own certificate unless authorized to do so by the landlord. Now, obviously, a landlord can't actually prevent the tenant from getting their own EPC if they are legally required to do so. Illegal restrictions have no effect in law, but perhaps the landlord could insert a clause that the tenant must use an EPC consultant who is recommended by the landlord. Trying to keep it from going rogue. Perhaps it's also worth bearing in mind that EPCs address the use of energy, but not the consumption of other resources such as water or even construction materials. Will we soon see water performance certificates or recycled building materials certificates? Some landlords foresee changes and try to insert clauses that oblige the tenant to comply even with unknown future provisions. Bear in mind that these general sweeper clauses place a contractual obligation between a tenant and their landlord to comply with an as yet unknown legislation that they would be expected to adhere to anyway. By law, the landlord might as well insert a clause saying that tenant shall never, ever break any laws ever about anything. Environmental clauses should not be general sweepers. The unknown consequence could seem like nothing now, but then have a substantial impact years down the line. Imagine a sweeper clause that wraps up general concepts of environmental performance, such as the consumption of energy, the generation of greenhouse gas emissions, the consumption of water, all waste management, the consumption of other unnamed resources. And other environmental impacts which might not yet be envisaged or encapsulated in law. Imagine it. I've seen it. A lease, which puts this lot, much of it currently unmeasurable onto the tenant's shoulders as a contractual obligation to their landlord. If the rules change, if new laws are decreed, if public expectation changes, then the tenant is expected to comply at their own cost. Indemnifying the landlord book passed. The landlord considered themselves to be green because the tenant will pick up the tab of whatever is deemed necessary in this sweep up. The landlord doesn't have to precisely predict the future. Just hedge against it. The landlord doesn't have to name all the likely upcoming legislation. Just state that the tenant must comply with it, whatever it is. So tenant beware. Don't accept loosely or sneakily worded sweepers and don't become contractually obliged to a landlord for their view on your compliance with legislation. That relationship exists with the state, not with the landlord. If the state isn't prosecuting you for non-compliance, why should the landlord be able to do so? And if you think this sounds a bit extreme, like it could never happen scaremongering kind of stuff, let's consider what obligations currently exist outside of the lease, which the landlord might refer to for the sake of green completeness and how these obligations might evolve over time. Sustainability is a concept. Sustainable is an adjective which might be peppered through a lease in general terms, but sneakily convey weighty obligations onto the tenant. If the terms are not robustly defined, a tenant could end up contractually bound to comply with vague regulations, for example, which might impact that tenant in choosing or using any product or service. If its origins could be deemed by whoever as unethical, unsustainable, or poor for the environment. As we discussed earlier, if the regs, rules and laws, or even just public expectation changes during the term of a lease, does the tenant have to leap to comply? What if those changes impact the tenant's ability to use the premises to repair them, to maintain them? Can the tenant simply walk away? Can they dodge the requirement for a simple reason like the building wasn't constructed that way, or that modern upgrades are prohibitively expensive? We might draw a comparison with a classic car, a thing of beauty from a bygone age. It can't run on electricity or even unleaded petrol. It doesn't have a catalytic converter or fuel injection. It doesn't comply with modern standards, but currently it gets a pass because it's a classic. But that's not to say the rules couldn't change, and all classic vehicles could be consigned to ornamental purposes only, never to spark a plug. Again, the same goes for existing buildings. If the tenant can't be a hundred percent sure what the future might bring, why sign up in the lease to be responsible for it? Beware a poorly drafted lease which might sneak in an obligation for the tenant to share any documents or data or info relating to environmental issues or energy Use this wide sweeping obligation could mean divulging operationally sensitive info and could be particularly onerous if it opens up an opportunity for activists to make life difficult for the tenant. Just look at how environmental pressure has impacted on the rules for packaging. These obligations sit outside the lease, but environmentally conscious landlords might try to make reference to them creating a legal contractual obligation to the landlord to comply with legislation that has nothing to do with property. There are already some strenuous packaging rules, which have been applied to retailer since 1997. That's 25 years ago, retailers and packaging handlers have been required to evidence that they were meeting targets to manage label and finance the recycling of surplus packaging materials. A particular tariff is plastic packaging tax. PPT applied on all packaging with less than 30% recycled plastic. Now, those 1997 rules have evolved in a way that could never have been envisaged 25 years ago or even 10 years ago. The old rules meant that no single party was fully responsible for the cost of recycling. A lot of that cost felt to the taxpayer, and nobody ever seemed to be fully responsible. But new EPR regulations extended producer responsibility mean that individual businesses are fully responsible for costs. The new intention is to nudge manufacturing and retailers to move away from hard to recycled products. These new rules became effective 1st of January, 2025, and from October, 2025, the government through DEFRA and PAC UK will start invoicing businesses for waste management fees. Retailers must register with the relevant environmental regulator and report their statistics and data. See the link in the show notes about this. There is a distinction between small business and big business. Retailers should check their status. Small might mean that you have to record your packaging usage. But that your supplier should handle the purchase of the prn. That's packaging recovery notes and pay the fees. But large status might mean that you have to buy the PRN and from the end to end recycling. It's complex. Don't get caught out. But most importantly, don't let the lease compel you to comply. Sustainability is a worthy cause, but your landlord shouldn't be the judge and jury of your performance. Unless they clearly state their agenda before you sign up, in which case you would've had a choice. So in conclusion, we acknowledge the old stuffy leases should be modernized to reflect the brave new world we inhabit and in which we do business. We accept that the 1954 Landlord and Tenant Act doesn't give a tenant automatic rights to level up their leases. It's all a matter for negotiation. We agree that environment is a worthy cause, but landlords shouldn't be the arbiters. Pandemics and other acts of God might impact business, but landlords don't necessarily have a moral compunction to let the tenant off the rent. So if you are a business tenant about to sign a new lease, make sure you get sound professional advice from a subject matter expert with relevant experience in this sector. General advice isn't good enough. It needs to be specific. The value of good advice can far outweigh the cost. See it as an investment in peace of mind, cost control, damage, limitation in being prepared. Thank you for listening to that Retail Property guy. I hope you enjoyed today's discussion and found it both entertaining and insightful.. If you enjoyed the show, please consider leaving a review. Thanks again for tuning in.