Whether or not a landlord should be able to introduce ‘climate friendly’ lease provisions in a renewal leases under the Landlord and Tenant Act 1954 (the “Act”) is a matter of some contention.

Although not setting a legal precedent, the recent decision in WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH [2021] provides an early indication of the Courts’ approach to these issues.

Background

The case concerned an uncontested business lease renewal of WH Smith’s retail unit in Westfield, Shepherds Bush.

The service charge provisions of the existing lease contained a ‘sweep up’ clause which allowed the landlord to recover the cost of any service or amenity which its surveyor reasonably thought appropriate for the improved management of and/or use of the shopping centre by the other tenants and shoppers.

Issues

The landlord attempted to introduce new provisions to allow it to recover through the service charge the cost of improving the environmental/energy efficiency of the Westfield centre.

These were: ‘any or all of the following [costs] (provided that in doing so the Landlord shall act reasonably and in accordance with the principles of good estate management):

  • undertaking any environmental and/or emissions and/or energy audit in respect of the Premises and/or the Facility;

  • the carrying out of any works or doing anything else so as to increase the energy efficiency and/or reduction in carbon emissions from the Premises and/or the Facility;

  • the provision in the Facility of separate energy supplies or of sub-meters to record energy supplies;

  • commissioning, obtaining, preparing and/or providing any EPC, DEC or any ancillary documents and supporting data in relation to the Facility including the fees, costs, expenses and disbursements of any assessor engaged to prepare the EPC and/or DEC (provided that in so doing the Landlord shall act reasonably and in accordance with the principles of good estate management);

  • taking all steps deemed desirable or expedient by the Landlord to improve the energy efficiency of the Facility (including those required to implement any recommendations or requirements included in any EPC or DEC) (provided that in so doing the Landlord shall act reasonably and in accordance with the principles of good estate management)’.

The landlord argued that:

  • the amendments merely clarified the existing position under the lease as the ‘sweep up’ clause already allowed it to recover these costs,

  • the changes constitute ‘reasonable modernisation’ as they reflect changes in law (presumably the introduction of Minimum Energy Efficiency Standards (‘MEES’) regulations although this was not made clear), and

  • the tenant is adequately protected by the qualification that the landlord must act reasonably and in accordance with good estate management principles when incurring and recovering these costs.

Decision

Where the court is asked to impose a new term in a renewal lease against the will of one of the parties, the party requesting the change must demonstrate that it is ‘fair and reasonable in all the circumstances’.

Here, the judge didn’t like the landlord’s supporting case and found that it had failed to satisfy this test.

In particular, he:

  • did not agree that the new terms clarified the existing position but, rather, the lack of detail the landlord provided about the types of works it intended to be caught by the clauses made the likelihood of dispute ‘highly likely’, and

  • The alleged protection offered by the ‘good estate management’ qualification was too vague to compensate for the increased commercial burden posed to the tenant.

What next?

Although the judge’s decision is unhelpful for landlords looking for costs of improved energy efficiency to be recoverable under renewal leases, the matter is far from closed.

The judge does not dismiss such changes out of hand and left open whether they can constitute reasonable modernisation.

The case serves as a useful reminder to landlords to think carefully about any changes they want to make to a renewal lease and the need to put forward clear supporting evidence as to why these are necessary.