Ask us at Frettens
Here's some frequently asked questions on commercial property, if you need to ask us anything more please get in touch using the form on the right.
Q. What are Minimum Energy Efficiency Standards (MEES) and who do they impact?
MEES set minimum energy efficiency standards which must be met for let properties. The regulations do not apply in respect of property sales. They affect both landlords and tenants of proposed, new and existing leases. They apply to residential and commercial properties, however this article focuses on commercial property only.
The minimum standard is a valid Energy Performance Certificate (“EPC”) rating of E. Ratings of F and G are below the minimum. Where the property falls below the minimum it is known as a “sub-standard property” and the MEES regulations apply.
Q. When do Minimum Energy Efficiency Standards come into force?
1 April 2018 – from this date a new lease cannot be granted for a sub-standard property unless:-
- an exemption applies;
- all relevant energy efficiency improvements have been made; or
- the lease is not caught by the regulations.
Q. What should I be doing as a landlord?
Landlords should consider:-
- Improvements – if the property is sub-standard, have all relevant energy efficiency improvements been made?
- EPC’s - the timing of an EPC may be critical if the result is that the property is sub-standard. To retain control, a landlord may consider placing restrictions on a tenant’s ability to commission an EPC. It may also be appropriate to firstly obtain a draft EPC.
- Foresight – planning ahead and also considering that in the future the minimum standard may be increased.
- Relevant date- it is important to determine which relevant date applies. This is particularly important for extensions or lease renewals where the tenant has remained in occupation.
- Improvement costs– the cost of relevant energy efficiency improvements where the property is sub-standard.
- Non-compliance – may result in enforcement action (including fines and public exposure) and a decrease in the property value. As an existing lease will continue, it may also impact matters such as rent review.
- Onerous lease – the rental amount a tenant may be willing to pay may decrease if the lease clauses are too onerous.
- Consents – are any third party consents required such as a lender or head-landlord?
Q. What should tenants be doing?
Tenants should consider:-
- Sub-standard – if the property you are letting is sub-standard the landlord may be exposed to enforcement action. As the lease itself will continue, rent should be paid and all covenants continue to be observed.
- EPC’s – there may be situations where a tenant would need to commission an EPC, for example on lease assignment, and the lease should reflect this.
- Improvement costs – does the lease allow the landlord to recover the cost of undertaking relevant energy efficiency improvements from the tenant?
- Improvement works – does the lease require or allow the tenant to carry out energy efficiency improvement works to prevent the property from being sub-standard?
Q. What is Overage provisions on land?
Overage gives you, as a seller, a second bite of the cherry. As well as receiving the sale proceeds, overage allows you to share in any increase in value in a property that is realised after the property has been sold.
Overage provisions on land or property can also be referred to as clawback or uplift clauses.
If certain circumstances occur (at some stage after completion of the sale) the buyer makes an additional payment(s) to the seller for the same piece of land.
Q. When should I think about overage?
Overage obligations allow you to sell at the current market value of the property, without having to forgo a share in the development potential of the property when that is actually realised.
If you are selling a piece of land or property and you think there is a reasonable expectation that the land may be redeveloped or that a valuable planning permission may be granted in the future, we would suggest that you think about overage. That way, you have a mechanism for getting a share of the uplift in value after completion of the sale.
Q. How do Overage payments work?
There are five main elements of an overage clause:
- What will trigger the payment?
- How much will the payment be, and how will it be calculated?
- Will making a payment release the obligation?
- How will the payment be secured?
Q. How long does Overage last?
In short, the overage agreement will apply for whatever number of years the seller and buyer agree at the outset. There is no minimum period but often the parties will agree a set time period such as ten or twenty years.
The length of time will often depend on the nature of the event which will trigger the payment, and the likely timescale for this to occur.
If the land is being sold to a developer who will immediately apply for planning permission, then a relatively short period of time may be agreed - perhaps 5 years. However, if the land that is being sold may not be available for development for 20 years, a much longer timescale is likely to be agreed.
The overage is often registered at the Land Registry and will attach to the land if it is sold on. This means future buyers are likely to be caught by the overage as well.
Q. When will Overage payments be triggered?
There is no set rule here. Overage payments are not standard and different arrangements will apply to each transaction depending on what the buyer and seller agree.
Some examples of circumstances which might trigger an overage payment are:
- If planning permission is granted for:
- a change of use; or
- the construction of another property within the land owned; or
- demolition and re-building of a more intensive development.
- If the property is sold with benefit of a planning permission but the seller envisages that the buyer may obtain a more favourable or intensive planning permission in the future.
Q. How much Overage will the buyer have to pay?
The overage agreement will specify what is payable. Sometimes it is a set amount or there could be a formula to calculate the amount payable. Or you could say a percentage of profit is paid. Sometimes the amount is linked to an index such as the retail prices index.
Q. Will making an Overage payment release the obligation?
In short, this depends on the clause. Sometimes, a one-off payment will be triggered if a certain set of circumstances are met.
In other cases, the overage sum will be payable each time a certain event happens, i.e. each time a planning permission is granted or each time a property on the development is sold. You need to be clear about what you are agreeing and what is drafted into the paperwork.
Q. How will Overage payments be secured?
There are a number of ways to secure your overage agreement, including by way of a contract, a guarantee, a charge or a covenant on the title.
The most usual method is to register a restriction on the title to the property and a requirement that upon any future sale, any new owner will enter into a deed with the seller confirming they will comply with the terms of the overage agreement.
Q. What is a break clause for a commercial property?
A clause within the lease that enables you to bring your tenancy to an end before the expiry of the contractual term.
Q. Can you transfer a commercial lease?
You can usually transfer a commercial lease to someone else if you have the permission of the landlord. This can be done by way of a process called assignment.
However, some leases includes clauses that absolutely forbid commercial lease transfer. So, getting the right legal advice is important both before you enter into the lease and before starting the assignment process.
Assignment is the process of transferring a commercial lease to someone else. Once assigned, it will be the new tenant’s responsibility to comply with the terms of the lease (although typically, the original tenant will be asked to sign an Authorised Guarantee Agreement to protect the landlord).
Q. How do you assign a commercial lease?
Most leases restrict assignment and require the written permission of the landlord before assignment can take place.
First, the tenant needs to find someone to take over the lease (referred to as the ‘assignee’). Next, the tenant should obtain consent from the landlord – if they agree, they will usually provide a Licence to Assign. Other consents may also need to be obtained, for example, if the landlord has a mortgage, the lender’s consent may be needed. Once the Licence to Assign has been signed, the formal transfer can proceed. Depending on the lease, the final transfer may need to be registered at HM Land Registry.
For a detailed explanation of the lease transfer process, read our article on Transferring/assigning a commercial lease to someone else.
Q. What is the difference between assignment and subletting?
While often referred to together, assignment and subletting are two different processes with very different effects on the landlord-tenant relationship.
While assignment is the process of completely transferring a lease to someone else, subletting is the process of letting commercial property to a new tenant by creating a new ‘sublease’. The original tenant remains obligated to the landlord under the ‘headlease’.
Like assignment, the landlord typically needs to consent before the property can be sublet.