What environmental measures are taking effect in the property sector?
The Climate Change Act 2008 established a legally binding target to reduce the UK’s greenhouse gas emissions by at least 80% by 2050 in comparison to 1990 levels and set interim five-year targets up to that date.
In addition, the Energy Efficiency (Private Rented Property) Regulations 2015 and the Minimum Energy Efficiency Standards (MEES) regime created additional compliance requirements for commercial premises.
Since April 2018, on the grant of a commercial lease, the property being let must have an Energy Performance Certificate (EPC) rating of at least an “E”. Retrospective plans are now being implemented that will require that from April 2023, all existing commercial properties being leased must have at least an EPC rating of “E”.
Furthermore, from 2027, legislation will necessitate that a commercial property being leased has an EPC rating of “C”, and by 2030 a rating of “B”.
Why should landlords beware?
Any new 5-year lease granted from 1st April 2023 will of course need to comply with at least an EPC rating of “E”. This is a relatively low-level requirement. However, the future statutory obligations will require that the EPC rating be increased to “C” before the lease expiry, and, if renewed, this will require that the property’s rating be increased to a “B” by 2030. To meet these requirements, more onerous improvement works are expected to be needed.
The implementation of any improvements necessary to comply with legislation will certainly have cost implications, and the interpretation of the lease terms (and any side agreements) will determine who needs to pay. These works might cause disruption to the tenant while they are being implemented. Great care should therefore be taken when seeking to apportion the cost and implementation of environmental improvements in commercial leasing arrangements.
At present, most commercial leases provide that improvements (rather than maintenance which is collected via a service charge) are borne by the landlord. The improvement works may increase the overall value of the landlord’s building, which is a benefit to the landlord. The landlord should then be able to charge a higher rent to tenants. However, in a tenant-driven market, that may not always be the case.
Tenants are unlikely to want to contribute to the cost of improvements to the landlord's building if they are only going to benefit during the short term of their lease.
Landlords should check their property portfolios to understand how current lease lengths may impact their exposure.
What are the exemptions?
The Energy Efficiency (Private Rented Property) Regulations 2015 introduces certain exemptions to these requirements. Most notable are:
- The Consent Exemption. This can apply where the landlord has sought and has taken all reasonable steps to obtain consent from a third party whose consent is required to undertake the improvement works, for example, a tenant or Local Authority. In the absence of such consent, it may be possible for the landlord to rely on this exemption.
- Economically Efficient Exemption. This exemption applies where a recommended efficiency measure is not a “relevant energy efficiency improvement” because the cost of purchasing and installing it does not meet the 7-year payback test. This means that the expected savings on energy bills as a result of the measure being implemented do not exceed the cost outlay in carrying out the measures. This exemption only applies to non-domestic properties.
Other exemptions may apply, but legal advice should be sought before trying to rely upon them.
What are the penalties for non-compliance?
Failure to comply with these Regulations will incur a penalty upon the landlord. Penalties will be staggered. For example, where a non-compliant property is let for less than 3 months it will attract a fine of 10% of the rateable value of the property, up to a maximum fine of £50,000. If the non-compliant property is let for more than 3 months it will attract a fine of 20% of the rateable value of the property, up to a maximum fine of £150,000.
Providing false or misleading information to the Exemptions Register will also attract a fine of £5,000, and the landlord’s non-compliance will be publicised.
Should leases include “green provisions”?
At present, there is no legal obligation in either the public or private sector to use “green provisions”. However, it is advisable to ensure that the lease is future-proof and for relevant parties to be seen as being progressive given corporate reporting obligations (s.414CA Companies Act 2006).
The “green provisions” can include issues such as water management, waste management (including recycling), the use of sustainable materials, heating and cooling services, and also incorporated services to encourage the use of green transport, such as the inclusion of showers and cycle storage within the building.
How 3CS can help
For legal help and advice concerning your commercial lease or building, please get in touch with your usual 3CS contact.
