The government laid draft regulation for parliamentary approval under the provisions of the Energy Act 2011, which is designed to improve the energy efficiency of privately rented, non-domestic commercial property in England and Wales.
The laws will apply from April 2018 on the granting of a lease to a new tenant or on a lease renewal. From April 2023 the regulations will apply to all privately rented commercial property where a lease is already in place and tenant in occupation.
In circumstances where a tenancy is granted, for example by operation of law, the landlord will have six months to comply. Similarly, when a non=compliant property is sold with a tenant in situ, the new landlord will have six months to improve the property or apply for an exemption.
Exemption parameter for commercial property
The minimum energy efficiency standard will be set at 'E' EPC rating and landlords must raise the energy efficiency of their properties to at least this level before letting on the open market. There will be safeguards to guarantee that only permissible, appropriate and cost-effective improvements will be made and landlords may apply for exemption allowing them to let properties below the 'E' EPC rating if they can prove the property falls with certain exemption parameters:
- The letting term is less than six months or longer than 99 years; or
- That the required measures are not cost-effective, either within a seven-year payback or under the 'Green Deal's Golden Rule'. This says the energy savings made at a property in a 25-year period must be equal to, or more than, the cost of implementing the changes in the first place. In short, it is not worthwhile to install a measure with a negative payback; or
- Despite reasonable efforts, the landlord cannot obtain the necessary consents to install the energy efficiency improvements - including consents from tenants, lenders or superior landlords; or
- That a qualified expert has confirmed that the required measures would reduce the value of the property by 5 per cent or more or that wall insulation will damage the property; or
- That upgrade measures would require an unacceptable alteration to the character and look of a historic building.
In recognition of the legal and practical complexities of the sector, the government will review the operation and effect of the rules every five - the first review is in 2020.
The effect of these regulations will be increasingly felt across the sector, particularly when all leased property falls within the EPC 'E' rating requirement in April 2023. Data from the existing EPC national register shows that 18 per cent of commercial properties have EPC ratings of 'F' and 'G' and a further 20 per cent are rated at 'E'. This means that as April 2018 approaches, owners and occupiers will need to consider their options and portfolio strategies to make sure that they do not fall foul of the regulations.
Indeed, evidence from the Service Charge Operating Report for Retail 2015, published by Property Solutions, notes that 43 per cent of shopping centres have an EPC rating of 'E' or below.
The Energy Act rules place a big responsibility on FMs to assess how the portfolios of properties they are managing will be affected. The first step is to arrange an energy performance survey on properties that do not already have an EPC. The properties being managed should then be graded in EPC order to assess those that may require energy-efficiency upgrades. The properties that fall below the 'E' EPC rating then need to be considered in detail from operational, management, tenure and strategic viewpoints so that an assessment can be made about the viability and operational need to carry out upgrades.
The property-by-property assessments require input from property and facilities managers so that full visibility of the business requirements for those premises and their operational contribution can be seen. A property-by-property matrix is constructed to show the results of the investigations, enabling decision to be taken about the operational imperative of each property.
A key element of this process is estimating the costs associated with raising the energy efficiency of the property and the effect of these works upon the value, 'letability' and practical use of the premises afterwards the costs need to be weighed against the savings in energy consumption over time and the effect this will have on rental and/or capital value.
There is also the important question of whether one of the exemptions applies to the deficient properties. Even if an exemption applies, would it be prudent to carry out energy-saving works anyway to reduce overall running costs?
Landlords may find that some of their properties will become unmarketable after April 2018 if they are not upgraded. The value of their investment could be adversely affected, rental values at review may fall, and the viability of lease renewals could be put in doubt.
Compliance365 is an independent energy consultancy. We provide advice and guidance on all our services; how to save energy; how to save money on your energy bills; and ultimately how to become more energy efficient. Our aim is to be as cost effective and flexible as possible for our clients.
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