Calling all commercial landlords and tenants: beware of poor energy efficiency
Government targets
The UK is working to cut greenhouse gas emissions by 80% by 2050. To meet its target, the government has calculated that energy use per capita will need to decrease to be between a fifth and a half lower than it is today. Given that a 2009 report found that commercial buildings accounted for 12% of the UK’s total greenhouse gas emissions, the government has legislated to drive forward efforts to improve the energy efficiency of commercial buildings.
The impact for landlords & tenants
From 1 April 2018, a landlord of commercial property will be prohibited from granting a new tenancy, extending or renewing an existing tenancy, if the EPC rating of the property is below band “E”. The regulations don’t stop there, as from 1 April 2023, a commercial landlord will be unable to continue to let a property where the EPC rating is below band “E”.
Of course, there are exceptions to this, but the exceptions are very specific to a particular property and the parties involved. What is certain, is that the regulations will affect both landlords and tenants. In order to meet the minimum energy efficiency standards, a landlord will need to assess what works can be carried out in order for the property to meet these requirements. If permitted to do so by the terms of the lease, the landlord may look to pass the liability or cost of the associated works down to the tenant, through the service charge for instance. Or the landlord may wish to access the property to carry out the necessary improvement works itself.
Tenants will need to check their lease to assess whether the terms oblige them to improve the energy efficiency of the property, or whether the landlord may carry out the works and require the tenant to pay through the service charge.
If you are looking to charge your property, note that lenders are advised on the EPC rating of the property. Consequently, a lender may by unwilling to lend where the minimum energy efficiency standards are not met, since this may affect the value of the property.
The consequences
Financial penalties of up to £150,000 may be enforced against a landlord that continues to be in breach of the regulations for three months or more. The enforcing agency may decide to impose an additional penalty, or in some cases, an alternative, whereby the landlord may be publicly named and shamed on an exemptions register.
One final point to note on the minimum rating and the energy efficiency standards – if you are satisfied that your property meets the minimum band “E” standard, be aware that the band “E” threshold may be raised in the future, as may the level of energy efficiency that needs to be achieved in order to reach band “E”.
It is clear that the energy performance of properties is coming under increasing scrutiny and is likely to become subject to tougher requirements as the UK moves to meet its target of cutting cut greenhouse gas emissions by 80% by 2050.