Energy-performance clock is ticking for landlords
With forthcoming regulations not allowing the letting of commercial buildings below a minimum EPC after 2018, the David Fairley of property consultant Sanderson Weatherall, considers the potential impact for commercial landlords and possible ways forward in improving the energy performance of their buildings.
Under the 2018 EPC Minimum Standards Regulations [EPC is Energy Performance Certificate], landlords will only be able to let properties if they have achieved a minimum EPC rating band of E. Figures suggest that 18% of commercial property in the UK currently has an EPC rating of F or G, with just two years to meet the standard.
Under Section 49 of the Energy Act 2011, landlords will be prohibited from letting (but not selling) any property that does not meet the minimum energy performance standard (MEPS) by 1 April 2018. The bill was introduced to try and speed up energy-efficiency upgrades in the non-domestic sector. It means landlords with properties which have an EPC rating of F or G, will only be able to let the property after they have carried out improvements to bring it up to the minimum EPC rating band of E.
It is estimated that buildings account for around 40% of the EU’s total energy consumption and 43% of the UK’s total carbon-dioxide emissions. In addition, data from the national EPC register suggests that 18% of commercial property has an EPC rating of F or G and a further 20% has a rating of E.
It is clear that the 2018 EPC minimum standards regulations will have significant implications for landlords and occupiers who wish to assign or sub-let space. Most notably, it will be impossible to market properties with F and G ratings unless they are upgraded to meet the minimum standards. Whilst further clarification is required on the transactional trigger for minimum energy standards, it is likely that they will apply to all lettings and re-lettings, including sub lettings and assignments.
However, there are further implications too. The impact on valuations of such properties is likely to be affected, with a significant diminution in their value. Rent reviews for properties of an F or G rating are also likely to be affected. The effect of diminution in value and Section 18 implications with regard to unlettable properties is also a matter that will need to be further considered at the end of a lease, during the dilapidations assessment. Any property with inadequate energy-efficiency measures will be affected.
Although the regulations are to be brought into force from 1 April 2018, the Government is proposing several instances where a landlord may be exempt from compliance and therefore able to legally let a property with an EPC rating below the minimum requirements.
A landlord will be able to claim an exemption if third-party consent is denied from tenant, lender, planning authority or a higher landlord/ freeholder, and will have six months to comply with the regulations or register an exemption following lease renewals. The exemption is also only available if the proposed energy-efficiency improvements would have a negative impact on the value of the property. There is also dispensation if all the improvements that are possible to be undertaken at no upfront cost to the landlord, such as those that can be completed through a Government finance arrangement, still do not lift the EPC rating above the minimum requirements.
In accordance with the procedures currently in place for EPCs, the enforcement of the MEPS regulations will be via local Trading Standards Officers. The level of penalty has not yet been disclosed but is likely to reflect the rateable value of the property, with fines in the region of £5000 to £150 000, depending on the length of the non-compliance and the rateable value of the property. There will also be a penalty of £5000 for providing false or misleading information to the exemptions register.
By working with a property consultant to complete a review of their property portfolio, landlords can identify those properties with a rating below the minimum Energy Performance Standard and, crucially, establish the cause of the rating.
Leading property consultants can also support landlords to identify what improvements could be made to raise the energy standard of the property, assess the lease to identify where the responsibility lies and provide an assessment of the impact on maintenance life-cycle costing.
Even if a property does not meet the minimum standard, this regulation will not necessarily mean that expensive energy-efficiency upgrades are needed. In some cases the rating may be a direct consequence of inefficient tenant alterations which will be removed at the end of their term, whilst others may discover that refurbishing the external fabric of the building as part of normal cyclical maintenance could upgrade the rating.
Clearly there is still some detail to be confirmed, but with less than two years until the regulation comes into force, landlords must act sooner rather than later to ensure compliance and reduce energy bills for tenants — before it’s too late.
David Fairley is a partner and accredited non-domestic energy assessor at property consultant Sanderson Weatherall.