The Energy Act 2011 contains prospective legislation relating to energy efficiency in commercial buildings (and residential buildings) which threatens to have a significant impact on the property market.
The Act provides that, from April 2018 at the latest, it will be unlawful to rent out residential and business premises which do not reach a minimum energy efficiency standard.
The detailed regulations have not yet been issued but the Government has indicated that the lowest acceptable energy rating is likely to be E. This means that landlords of F & G rated buildings (and tenants who wish to sublet) will be unable to let them out after April 2018 unless they take steps to improve the energy efficiency of those buildings.
At least 18% of UK commercial property stock will be affected by the new law. Accordingly, if improvements are not made to energy efficiency, the industry runs the risk of nearly a fifth of its commercial buildings becoming obsolete.
It is of course possible that the proposals contained in the Energy Act 2011 may be altered significantly or abandoned altogether, but, equally, 1 April 2018 is the latest date on which the law may come into force so the new regulations could actually be implemented sooner.
Property owners and lessees of buildings are advised to consider what action they should take now rather then possibly exposing themselves to increased costs over a shorter timescale in the future.
There are some points arising from the wording of the Energy Act that are worth noting:
- Sales are not currently caught by the legislation, only leases. It is not yet clear whether the rules will apply to the grant of a long lease for a premium (which is generally treated as a “sale” despite technically being a lease)
- Assignments do not appear to be caught by the new law. So, a tenant may be able to assign its lease of an energy inefficient building after 1 April 2018 but not sub-let it
- We do not yet know what is expected to happen to premises let under existing leases whose terms will continue beyond April 2018. It is possible that they could be caught by the new law
- These apparent inconsistencies are not commercially helpful and it will be necessary to await the detailed regulations
Advice for property owners and landlords
- All rentable properties should have an EPC assessment
- Where the EPC rating is “F” or “G” (or is close to the boundaries), an energy efficiency plan should be put in place to improve the energy efficiency of the property. This should include assessing the cost and benefit of improving energy efficiency and weighing these against options to market the property and/or to re-gear the Lease
- Energy efficiency improvement should take advantage of void periods, lease breaks and/or be included as part of the ongoing maintenance and plant renewal programme
- Energy efficiency improvement works should be implemented before April 2018
- Applicability of Green Deal finance to particular buildings needs to be assessed
- A purchaser/tenant should ask to see the EPC and recommendation report as early on in the transaction as possible and review them carefully
- If the EPC reveals that the Property is F or G rated without certain works being carried out, consider the impact this will have on the investment value of your purchase or the rental value of your lease. Should you be negotiating a price or rent adjustment to cover the cost of energy efficiency improvements or do you wish to look elsewhere?
- Tenants particularly should watch out for hidden improvement costs. Ultimately, tenants would be wise to think carefully before signing up to a lease on a poorly-rated building, not least because the poor rating may have on their ability to sublet any vacant space within their demise in the future
For further information on EPCs, please contact Rachel Krol at Clarkslegal or any member of the Real Estate Team.