Who will this affect?
1st April 2018 might seem a long way away, but Commercial Property owners, tenants and lenders should be considering their options now, in view of the provisions of the Energy Act 2011 (the Act).
The Act makes provision for the arrangement and financing of energy efficiency improvements to be made to properties by owners and occupiers in particular in the private rented sector.
Initial indications are that between 18 and 20% of current commercial properties will need to be improved in order to meet the Minimum Energy Performance Standard Regulations (the Regulations), which as yet still do not exist.
The energy rating of a building is determined by its Energy Performance Certificate (EPC) and the vast majority of commercial buildings are required to have an EPC before they can be sold or let.
Current assessments are that the threshold for compliance with the Regulations are that a building should have an E rating and therefore those buildings with F or G ratings will not be able to be let after the Regulations are in force, which is no later than 1st April 2018, unless significant efforts (i.e. the full package under the Green Deal has been implemented) have been made to reduce the rating to the lowest possible level.
The Green Deal provides a funding mechanism to ensure that any works required to raise the EPC rating of a building can be implemented without an upfront cost to the landlord/owner but the cost of the works and finance will be recoverable through the energy bills for the property from the party that instigates the works. However the savings from the improved services must be sufficient to cover the finance and capital costs.
Who is responsible for the works?
Owner occupiers are going to be responsible for improving the energy efficiency of their buildings.
If the building is let, a landlord of a non domestic property will be required to take such action to ensure a level of energy efficiency is provided in order to meet the Regulations and it may not let the property until the landlord has complied with the obligations mentioned in Section 49 (2) of the Act, thereby making such improvements in compliance with the Regulations.
In some and perhaps only limited instances (it will depend upon the wording of the service charge provisions in the lease) will the costs of these works be payable by a tenant.
A tenant would only normally be liable for the cost of repairs and not improvements, and therefore improvements may not be recoverable as part of the service charges. However it is not uncommon for service charge provisions to have a “sweeper clause” which entitles a landlord to recover under service charge expenditures incurred as part of good estate management, but tenants are likely to challenge any expenditure that improves the building.
Also in the current economic climate solicitors for tenants are attempting to remove any ambiguous clauses in the lease so that tenants do not have to pay for the “upgrade” of the landlord’s asset.
Actions to be considered
Owners and occupiers of non domestic properties should be considering their contingency plans to deal with the risks if the current proposals are implemented in full.
Investors and owners should review their portfolios now and consider what actions should be taken.
An owner or occupier needs to see what options are available to improve the EPC rating or possibly dispose of the property.
Tenants may want to sublet and should consider if they can make alterations and what landlords’ consent will be required. The Regulations will be in when the term comes to an end on leases where the term expires after 1st April 2018
A tenant will also need to consider whether or not funds can be obtained through the Green Deal and whether or not the repayments under the energy bills go beyond the terms of the lease, as landlords may reasonably request indemnities or may be able to refuse to give consent.
Tenants may also consider whether or not they should be renegotiating the length of their lease term perhaps for a longer term.