Pressure is mounting on commercial property landlords, with new energy efficiency standards set to come into effect in April 2018. From that point, properties with low energy efficiency ratings (F or G) cannot be let out.
The rules have left many wondering whether their contracts will be affected, so we’ve collated some of the key facts to help you understand what your next step should be.
Why are the rules necessary?
The Energy Act 2011, sometimes known as the Minimum Energy Performance Standards, required the government to introduce new regulations to improve energy efficiency in the private rented sector. At the time, around 20% of all commercial property with an Energy Performance Certificate (EPC) was rated F or G.
In response, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 established a minimum rating of E for both domestic and non-domestic sites.
Is my tenancy affected?
From April 1st 2018, the regulations will apply when a lease is granted to a new tenant, or when an existing tenancy is renewed. There are exceptions for tenancies that are particularly short or particularly long (less than six months or greater than 99 years), but the vast majority of agreements are affected.
A valid EPC must be provided when a property is let or sold and it expires after 10 years. The 20% of buildings with F or G ratings cannot, therefore, be leased from April onwards, unless they are improved and a new EPC is issued.
All this means new buildings must be designed with energy efficiency firmly in mind, or they run the risk of standing empty while retroactive improvements are made.
From April 2023, the minimum standard will apply to ongoing tenancies, so the owner of any property with an F or G rating runs the risk of eventually breaching the regulations.
What are the risks?
Apart from the loss of market value that inevitably accompanies a building with low energy efficiency, failure to adhere to the regulations will carry a penalty of up to £150,000 per property (depending on rateable value and length of time of the infringement).
Landlords also run the risk of publication of details of non-compliance, which could do significant reputational damage.
There are some exceptions to the rules, such as when no improvements are possible, but these must be registered. Providing misleading evidence is a fineable offence, so expert advice should be sought.
Small piece of the puzzle
For new developments and major refurbishments, 361 Consulting’s Michael Farmer recommends speaking to building services experts about the needs of the whole building and its potential occupants early, as appropriate design is much more cost-effective than retroactive improvements.
"Getting it right from the beginning not only helps avoid any compliance problems, it makes a building much more marketable," says Michael. "There’s no denying the fact tenants are becoming savvier about energy costs and the environmental impact of low-performance buildings, and the best companies want to provide comfortable, efficient, responsible environments for their staff.
"EPCs are government mandated and although important they must fall in to a wider strategy on energy efficiency, productivity and futureproofing."
To learn more about the energy efficiency regulations and how they could affect your portfolio, visit 361 Consulting.