Georgie Messent and Linda Fletcher highlight forthcoming controls on the sale and letting of energy inefficient buildings.
Commercial property owners face extra costs as they improve buildings to meet proposed minimum energy efficiency standards. The legislative framework will vary across the UK, however.
England and Wales
The Energy Act 2011 requires regulations setting out minimum energy efficiency standards to be introduced in England and Wales by 1 April 2018. The regulations have now been approved by parliament. These will make it unlawful for landlords to grant a new lease from April 2018 - the proposals do not affect sales - on commercial and domestic properties that have a minimum asset rating below E on its energy performance certificate (EPC) until efficiency improvements have been made. The improvements must be cost effective, the landlord incurring no upfront cost, as the work must satisfy the "golden rule" in a Green Deal plan or is cost-effective over a seven-year payback period.
There are several exclusions. For commercial properties, short-term lettings, less than six months, for example, are excluded. The regulations bring lease renewals within its ambit, however.
The new requirements are compounded by changes to the Building Regulations, which came into force on 6 April 2014. Under the changes, properties that have already been assessed for an EPC may be given a lower asset rating if a requirement for a new certificate is triggered and the property is reassessed under revised assessment criteria. As a result, an E rated property could be downgraded to an F, taking properties into the category where a new lease cannot be granted after April 2018 until efficiency improvements are made.
There are several exemptions in the regulations, including where the landlord has used reasonable endeavours to obtain a tenant's consent or planning permission to undertake energy efficiency improvements but consent has been refused or, in the case of planning, granted with unreasonable conditions. Exemptions will apply for only five years, when the landlord would have to reapply.
Of even greater significance is the additional requirement - from April 2020 for domestic properties and April 2023 for commercial properties - that landlords will not be permitted to continue to let a property with an asset rating below E unless energy efficiency improvements have been carried out first, again subject to there being no upfront cost for the landlord. Exemptions will apply.
Forthcoming regulations under the Climate Change (Scotland) Act 2009 will provide for improvements to the energy efficiency of non-domestic buildings in Scotland of more than 1,000m2 but which do not meet 2002 building standards.
The trigger for improvement work will be the sale or letting of a commercial property - although not lease renewals and not domestic properties - from June 2016. When there is a sale or let, the property owner will be required to provide the purchaser or tenant with an action on carbon and energy performance. This will comprise an EPC and an "action plan".
The action plan will set out how the energy performance of the building can be improved and greenhouse-gas emissions reduced. The purchaser or landlord will then have the option of carrying out the work set out in the plan within a set period - 3.5 years has been suggested - or recording the energy consumption of the property over time. It is anticipated that energy efficiency improvements will become increasingly mandatory as this regime is strengthened.
As in England and Wales, the regulations are expected to exempt premises covered by a Green Deal plan.
It is worth noting that, although EPCs play a key role in both regimes, in Scotland the basis for assessment of EPC ratings is different from that in England and Wales. This could lead to different ratings for otherwise identical buildings. It is hoped that this will be regularised in time.
Although Northern Ireland has implemented the Energy Performance of Buildings Directive in so far as buildings require an EPC, there are no proposals for the introduction of minimum energy efficiency standards on the sale or letting of buildings in the country.
Property owners, occupiers and investors should use the introduction of minimum energy efficiency standards in England and Wales under the Energy Act 2011 and the changes planned in Scotland under the Climate Change (Scotland) Act 2009 to review the energy efficiency of their existing building stock.
Risks need to be considered early and action taken if appropriate, taking advantage of any closure periods in the ordinary cycle of business where possible. When acquiring a property, its energy efficiency needs to be assessed and any improvement work factored into the valuation assessment and return on capital calculation.
The government's Green Deal scheme is one option for funding work to improve the energy efficiency of a building, with the cost repaid through energy bills. However, take up of the domestic Green Deal has so far been very low, and no commercial Green Deal package is currently available.