Long Term Implications of the Energy Act 2011
MORGAN & CLARKE AUGUST 2013 NEWSLETTER NO. 23
Pigeon House, The Broadway,
Oakridge Lynch, Stroud, Glos. GL6 7NU
Email: firstname.lastname@example.org Phone: 01285 719292
(Also at: London, Cardiff, Matlock, Braunton, Lewes)
How quickly some sunshine can change everyone’s view of the world. OK, not just sunshine, but the best and longest heat wave for seven years. Oh, and yes, you’ve guessed it, the Pubcos are plotting future Fair Maintainable Trade based upon “well, fantastic summers are here to stay”. But less of that! Think positive…… Justin Rose wins the PGA, The Lions win the Series, Andy Murray wins Wimbledon, Chris Froome the Tour de France and what about our cricket team. Wonderful!
1. The 2018 Repair Time Bomb
You first heard it here in previous Newsletters, but the stipulations of the Energy Act 2011 are now beginning to be recognised in legal circles as having a potentially spectacular influence on pub lease renewals.
By way of refreshing memories, Section 49 of the Energy Act 2011. The Act stipulates that by 1 April 2018, all commercial property being let in the open market, must exceed a guaranteed level of energy efficiency. Current informed thinking is that the energy performance level E might be the cut-off point. In every lease renewal case that we are currently handling, we are alerting the relevant solicitors to the following.
It is the obligation of the Secretary of State to produce definitive regulations that a Landlord may not let the property until that Landlord has made the improvements required by the regulations. The devil is always in the detail and for that reason it is worth referring directly to Sub Section 4 of Section 49 which has the following definitions:
- “Landlord” and “let the property” have the meaning given by the regulations (and “let the property” may be defined to include “continue to let the property”)
This has opened the proverbial can of worms. The implication is that the regulations contemplate that the Act should apply to property that is already let as well as property that is not yet let.
Every pub lease makes reference to the tenant’s compliance with all relevant statutory and civic regulations. The 2011 Energy Act is in the public domain and is technically known far and wide. The question has now arisen – should the lessee in occupation, (knowing the existence of the Act and that upgrading of the energy efficiency of the property will be required in under five years’ time), set aside a repairing fund for the full compliance or upgrading of the energy rating of the property. But there is yet another problem in that an Energy Performance Certificate (EPC) is not required on lease renewal and is only required for the grant of a new lease, or on disposal of the current lease. So if there is no EPC, how do you have “advance warning” that you are energy inefficient?
If an EPC was stipulated, who would commission it and who would pay for it? The implication is that the property, come what may, will have to have an EPC, even on lease renewal, for 2018 in order that there is full compliance with the 2011 Energy Act. Currently this is not a legal requirement.
You will not be surprised to note that there is considerable resistance from Landlords / Freeholders to force on them the specific obligation that responsibility for the full compliance with the 2011 Act in 2018 should automatically fall to them. Informed current reaction suggests they want to involve the Tenant! NO surprise there!
There is no instant solution to the problem as the Secretary of State has yet to clarify beyond doubt, the finalisation of Section 49 and the level at which the Energy Performance Certification will be set.
Another major problem that we can foresee, is if the Landlord is finally held responsible (in the body of the lease being renewed), for the full compliance with the regulations as follows. For example: we have an old, say, 17th Century pub with single glazed, lead-lighted windows, no roof insulation, etc. etc., and the Landlord is forced into undertaking the necessary works. Who will then pay compensation for the business being shut for perhaps three months while all of the windows are replaced (Listed building nightmare) and full energy compliance observed. There is, of course, nothing in current leases that governs the situation as outlined above, which then leads onto a further major problem.
Under Section 35 of the 1954 Landlord & Tenant Act, on lease renewal full account must be taken of the terms of the current lease as well as all relevant circumstances. The leading case in guidance is O’May v City of London Real Property Company Limited  which went all the way to the House of Lords. Basically, if you want to change the terms of a lease, it lies with the proposer to prove their case and a change should only be made if it is fair and reasonable. Whether “fair and reasonable” is forcing your Landlord to spend, say, £100,000 on your rambling, energy-inefficient Listed building of a public house, is quite another matter.
2. Repair Fund
There are a number of modern leases that require an automatic mandatory contribution to an annual repair fund and the Tenant can then draw down from this fund as and when repairs are deemed necessary. This all came about because of the current recessive economic climate. If the Tenant is cash-strapped, the last thing of necessity is to is maintain the building. If the money is not there and other bills are more pressing, it is always easy to put off non urgent repairs and maintenance and wait for another day. However, if there is a mandatory repair fund, it will be interesting to see whether the Landlord catches on to the Energy Act 2011 and starts to increase the annual sum concerned.
It is highly likely that further legislation will be required, as under Section 35 of the Energy Act 2011, there is the opportunity for the Landlord to seek to appeal the so-called sanction that appears to be imposed on the Landlord. Once again, we come back to an unforeseen burden on Landlords and as to what is fair and reasonable, and will more than likely include the co-operation of the Tenant in achieving and sustaining the efficient use of energy. All this must be clarified if at all possible, in any renewal of a lease that has a term longer than 1 April 2018.
We can see that the Energy Act 2011 is a crock of gold for the legal profession and although we are still five years away from the implementation date, lease renewal problems are starting right now.
3. Café Culture
We had the occasion to professionally attend the village of Dedham, Essex. There are two pubs at opposite ends of the very attractive High Street, namely the Sun Inn and the Marlborough Head. As licensed property valuers, one’s focus is primarily on pubs and their success – positive or negative. Each of the two pubs, over a sunny lunch time, were being reasonably patronised, although far from full. The Sun Inn is a high-end gastro pub with a wide range of draught beers and the Marlborough Head is a far more cost-conscious offering in standard pub grub mode. Both pubs were doing what could best be described as an OK level of trade.
Between the two pubs were a number of cafés located in what were once shop-fronts. All of the cafés were FULL. Suddenly the penny dropped with a considerable thud, that the café culture was actually far more successful than the pub culture which made us think as to why and also do further research.
Although blindingly self-evident, what are the main features of a successful café which ensures that you do not see multiple closures of cafés as you do with public houses?
There is no “standing” trade. Everybody is seated and there is only table service. The menu is always strictly limited and generally home-cooked. Pricing is very competitive with opening hours being generally mid morning until teatime. There is no evening opening. There is no bar servery, no draught products and wine, beer and cider is always served from bottles in a fridge. Tea and coffee and associated snacks are hugely popular and gross profit margins regularly exceed 70%.
As licensed property valuers, cafés per se do not really register in our lexicon of properties that we take notice of, walking up and down any town or village high street. Further research locally from our Head Office just outside Stroud, reveals that the cafés in Nailsworth, Painswick, Stroud, Cirencester and other local villages, are all thriving, some even requiring lunch time reservations seven days in advance.
The thought occurs that if a pub is of sufficient size and a function room or bar / restaurant that does not have a bar servery is specifically set aside as a tea shop or café, there is a ready audience that would seemingly never patronise pubs, but would be more than willing to take up the café culture.
Worth a thought!
4. What Qualifies as a Tenant’s Fixture and can be removed?
Before examining recent and quite entertaining case law, it must be remembered that it is almost a universal standard lease requirement, that all landlord and tenantable fixtures and fittings should remain in the premises at the end of the term, however that occurs. This applies to a standard inventory of tenantable effects to enable the business to continue functioning.
But what if you have established a micro brewery with the landlord’s consent that effectively has no direct bearing on the trading operations of the pub that it adjoins. You have installed fermentation vessels, mash tuns, concreted things to the floor, etc. etc. Does this brewing kit in all of its glory, now become a landlord’s fixture and as a direct consequence, have to remain when you depart the premises?
Recent case law in the shape of Peel Land & Property (Ports Number Three) Limited v T S Sheerness Steel Limited  EWHC 1658 (CH), is something of an eye-opener. Under the terms of the lease, the tenant erected and equipped the building as a steel-making plant and rolling mill. The landlord laid claim to the equipment at the end of the lease (as being landlord’s fixtures) and sought an order to restrain the lessee from either selling or removing the fixed equipment from the building. The sheer size of the premises and the bulk and complexity of the machinery, was evidenced in the fact that it took 6-8 weeks just to prepare an estimate and sequence of the engineering works. It was also agreed that it would take 12-18 months to remove certain items at a cost running into several million pounds.
Fixtures fall into two categories. They could be landlord’s fixtures which must be left behind at the end of the less, or tenant’s fixtures not covered by the standard retention obligations contained within a pub lease. The nub of the Peel case was that the tenant wished to remove the steel-making plant, some of which might have been capable of re-use, but all of which had considerable scrap value, but against the landlord’s will. The Judge in the case, His Honour Paul Morgan, found for the tenant and laid down four interesting tests which would apply in the scenario of our micro brewery example:
- The tenant’s fixture must be capable of removal without losing its essential utility and without causing serious damage to the property. If there was significant damage, the test was that it could be fully repaired.
- It was not relevant that the removal of one part of the unit rendered the remainder redundant or inoperable.
- It was not relevant that the removed fixtures should have any particular value, or indeed be re-usable. Age, obsolescence and value are of no interest to the law.
- The fact that the fixtures are bulky and awkward – as with brewery plant – and that the exercise of severance is complicated, does not rule out its removal.
The Court held that the tenant could remove all of the equipment, even if in part as scrap value.
Although the above example is applicable to three of our clients nationwide, it could also be relevant to excess and redundant play equipment concreted into a beer garden and as a final example, sculptures and works of art, again concreted into a trade patio that are considered specifically personal to the lessee and not a vital element of the trading profile of the property.
5. And Finally
“It was my Uncle George who discovered that alcohol was a food well in advance of modern medical thought” (P G Wodehouse)
“What shall we drink to?” “About 4.00 in the morning” (Sammy Davis Junior and Dean Martin)
“It is better to drink a little too much than much too little” (Anon)
Best wishes from the Team at M & C
Phone: 01285 719292