Most commercial leases contain a “compliance with laws” clause under which the tenant covenants to comply with all laws which relate to the property. This is likely to extend not only to the tenant’s occupation and use of the property itself, but also to the use of any services and equipment, to any works carried out to the property and to all materials kept at or disposed of from the property. It may prevent the tenant from doing certain things which wouldn’t otherwise be prevented by the lease, or require the tenant to comply with particular requirements. It may also require the tenant to carry out – potentially very costly – works to the property. A compliance with laws clause is often very short and tenants don’t always appreciate the additional obligations that may be imposed by its inclusion.
Why include a provision of this kind?
Surely the tenant must comply with the law whether or not his lease says so? Of course he must, but where the law requires a large financial outlay in order to comply with a law relating to property, it’s not always obvious whether the tenant or the landlord should bear the responsibility for this. A compliance with laws provision serves to shift responsibility onto the tenant. It provides evidence as to intention if the court needs to apportion the cost of compliance and gives the landlord a direct right of action if the tenant fails to comply.
However, just because the lease says the tenant is responsible this doesn’t always mean he’s legally responsible. Irrespective of what the lease might say, there are external rules and regulations imposed on the relationship, the building, the services used in the building, the use of the building and works carried out to the building and while some can be varied by agreement, others apply regardless of what may have been said in the lease.
What does compliance with laws entail?
Whilst this is by no means an exhaustive list, the following summary outlines the key matters that arise in the context of a standard commercial letting. An important point to consider when reviewing each of these, particularly if you’re a tenant, is whether there should be a specific carve-out of liability in respect of expenditure for which the tenant really should not be responsible under the terms of the lease. This will particularly be the case for short-term, low value lettings, where the burden of compliance may be disproportionate.
The Construction (Design and Management) Regulations 2015 apply both to a new building when it is constructed and to all works which are carried out to an existing building. One of the key requirements is the preparation and maintenance of a Health and Safety file. This file is the responsibility of the person who carries out works or appoints someone else to carry out works on his behalf. The arrangements will vary depending on the nature of the building (such as whether it is let to a single tenant or multi-let), the length of the lease and the respective repair obligations on the landlord and the tenant. An incoming tenant should check whether the building has a Health and Safety file, what is in any file that exists, whether any construction works have been carried out to the building, and who will have ongoing responsibility for it. It is important for the both the landlord and tenant to have an understanding of the information to be included in a Health and Safety file. Even if the tenant is not responsible for maintaining it, he will need to supply information to the landlord to include in it so he needs to know what details to supply.
It is important to remember that the building which the tenant takes a lease of is not suspended in the air: it lies on a piece of land. The contaminated land regime (set out in Part 2A of the Environmental Protection Act 1990) has the potential to impose some very expensive clean up liabilities on owners or occupiers of land.
If the Local Authority (or in some cases the Environment Agency) identifies land as being contaminated, it must serve a remediation notice on the “appropriate person”. The appropriate person is, in the first instance, the person who caused or knowingly permitted the contamination (Class A). However, if no Class A person can be found then liability passes to the current owners and occupiers of the site, regardless of whether they were aware of the contamination (Class B). Class B persons can escape liability for clean-up if they do not have an interest in the capital value of the land. This covers most commercial tenants but the position can be varied by express agreement between the parties – for example, by the landlord passing his obligations to the tenant under a lease by virtue of a clause which makes a tenant liable for compliance with laws.
Where contamination is an issue, this should be given very careful consideration before the lease is entered into and the parties should be absolutely clear on who should bear responsibility for any work and costs. The tenant may argue for a complete carve out of liability for historic contamination or may try to negotiate a “pie crust lease”, being one which leaves the soil out of the demised premises so that the tenant does not become the owner of this and therefore has no liability for it. The tenant should also seek covenants from the landlord to undertake any required works and an indemnity for a failure to do so.
Responsibility for compliance with the Control of Asbestos Regulations 2012 is likely to include both the landlord and the tenant as it catches anyone with responsibility for maintenance or repair of any part of a property, or access to it. The duty holder must determine whether asbestos is present (or likely to be present) in a building. If asbestos is present (or likely to be present), the duty holder must ensure that a determination of the risk is made and a plan or action is prepared. Before taking a lease, the tenant should ask for a record of any assessment that has been done in respect of the property. Where applicable the tenant should also see the landlord’s written plan as there may be cost implications and works which could impact on the tenant’s use of the property. The compliance with laws provision gives the landlord a direct right of action against a tenant who fails to comply with his duties.
Allocation of duties under the Regulatory Reform (Fire Safety) Order 2005 is similar to the allocation of duties under the Asbestos Regulations as it largely depends on who has control of the premises. Before taking a lease, a tenant should obtain information regarding responsibility for the risk assessment; if he is going to be responsible he needs to know this in advance as his duties will start immediately on completion. The main duties are to take precautions to ensure that people are safe in the event of a fire, to carry out a risk assessment and keep this under review, to maintain specified records, to provide information and training, to maintain fire-fighting and detection equipment and to keep fire escapes clear.
Alterations to the premises may be required under the Regulations in certain circumstances. However, a tenant must be aware that the provisions of the Regulations do not override the need to obtain any necessary landlord’s consent to the required alterations. This could mean that the tenant is placed in a position where he is in breach of the Fire Regulations (and therefore of the compliance with laws covenant in the lease) by failing to carrying out works to which the landlord is refusing to give consent.
Energy Performance Certificates
The Energy Performance of Buildings (England and Wales) Regulations 2012 impose obligations in respect of energy performance certificates (EPCs) and display energy certificates (DECs).
Whilst the tenant may think that the landlord has covered this by providing him with an EPC when he took the lease, the tenant is not absolved from all responsibility. Though the primary obligation to obtain an EPC lies with the landlord, there will be times when the tenant finds that he is liable for this, for example when carrying out certain alterations and when assigning the lease or subletting. The tenant may also have a duty to co-operate with the landlord’s preparation of an EPC, for example by allowing an energy assessor access to the property. In addition, for non-residential buildings with a useful floor area of more than 500m2 which are frequently visited by the public, there is an obligation to display the EPC (and, in some situations, a DEC); where the tenant has a lease of the whole building, or there is an EPC which relates to the let part of the building, this will be the tenant’s responsibility.
The Defective Premises Act 1972 imposes a duty of care on the owner of the building in respect of anyone who might reasonably be expected to be affected by defects in the state of the premises. A compliance with laws clause shifts that duty over to the tenant. However, because the Act prohibits the landlord from contracting out of his liabilities under the Act, this amounts to an indemnity: in effect the tenant picks up the tab if the landlord is found to be in breach.
Planning and Building Regulations
This is a complex area but particular points to note are:
- Compliance with planning law: if a tenant fails to comply with planning law, enforcement action can be taken against both the tenant and the landlord. A failure to comply constitutes a criminal offence under the Town and Country Planning Act 1990. The compliance with laws clause will not prevent action being taken against the landlord so a landlord will often include a prohibition on the tenant applying for planning permission without the landlord’s consent.
- Section 106 Agreements (Town and Country Planning Act 1990): where these have already been entered into it is worth establishing whether there are any outstanding obligations and where relevant carving these out of the tenant’s responsibility. As a tenant, you should also ensure that the lease contains an obligation on the landlord to observe the terms of the Section 106 Agreement and a provision that, in the event the Local Planning Authority decides to go against the tenant, the landlord indemnifies the tenant against any liability and costs.
- Building Regulations 2010: these deal with minimum standards on matters such as fire safety, toxic substances and drainage, as well as the structure of the building itself. It is important for a tenant to check that all initial requirements have been met by the landlord as this will have an impact on the ongoing compliance by the tenant with its various obligations. This will also be of importance in relation to any alterations the tenant wishes to make.
Under the Health Act 2006 it is a criminal offence to smoke in a smoke-free place (including any property open to the public or used as a place of work). It is also a criminal offence for a person who controls or manages a smoke-free place to fail to stop people smoking or to fail to display the required no-smoking signs. The tenant, and possibly the landlord, will be a person who controls a smoke-free place. The compliance with laws clause seeks to transfer all liability to the tenant: if the landlord is prosecuted his defence will be that it was reasonable for him to assume the property was smoke-free and adequately signed.
Where a physical feature puts a disabled person at a substantial disadvantage, the Equality Act 2010 requires anyone with a “duty to make reasonable adjustments” to take reasonable steps to avoid that disadvantage. This means that where a physical feature of a property (such as access by stairs only) makes it impossible or unreasonably difficult for a disabled person to access the property, a service provider or employer must take reasonable steps to allow access. Access could be allowed by, for example, removing the feature, altering it, or providing a reasonable means of avoiding it (eg installing a lift or a ramp, or making the services available online so that access to the premises is not required).
A tenant’s lease will almost certainly contain restrictions which would ordinarily prevent him carrying out such alterations to the property. The Equality Act deals with this by implying a term into the lease that the tenant can make reasonable alterations with the landlord’s written consent. This means that even if the lease contains an absolute or fully qualified prohibition against the relevant alteration the landlord will not be able to unreasonably withhold consent, though he will be able to impose reasonable conditions to his consent.
Where a tenant considers it necessary to make alterations it is essential that he makes a written application to the landlord for consent, even if he believes that the landlord will refuse such consent. If the tenant fails to do this and someone brings Equality Act proceedings against him, he will not be able to refer to the lease terms restricting alterations as a defence to his non-compliance.
What happens if the tenant fails to “comply with laws”?
Where a tenant fails to “comply with laws” the relevant authority may decide to take direct enforcement action; the nature of this action varies widely depending on the nature of the law and the seriousness of non-compliance but may include fines, enforcement notices and, in some cases, criminal sanctions. Alternatively, even if the authority does not take direct action, the landlord may try to enforce compliance by taking action for breach of the tenant’s covenant to comply. This may entail a financial claim against the tenant, an order for specific performance (obliging the tenant to comply, with criminal sanctions if he fails to do so), or even a forfeiture claim by the landlord, bringing the lease to an end for breach of covenant.
The tenant should also be aware of the impact that a failure to comply may have if he wishes to exercise a break clause which is conditional upon compliance with covenants: even if the relevant authority has not actively required compliance the landlord may still use this as a ground to deny the break.