Energy Efficiency Ratings: Environmental back-door tax on landlords, or sensible efficiency drive?
Mike Stoney, solicitor and commercial property expert, takes a look at what the changes to the regulations concerning the 'Minimum Energy Efficiency Standard' of properties will mean to landlords and tenants, alike.
Energy Performance Certificates (EPC's), which give a rating to a building's energy efficiency, much like you might see on a white electrical appliance, have been around for some time now and I think it's fair to say we all knew what would eventually unfold.
Sure enough, new regulations concerning the 'Minimum Energy Efficiency Standard' of properties in the UK have been passed and will gradually come into effect from 1 April 2016 (The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 Part 3). These Minimum Energy Efficiency Standards, or MEES as they have been termed, are set to have a significant financial impact on landlords who own commercial property.
The regulations state that from 1 April 2018 it will be a criminal offence for landlords to enter into new leases of their commercial premises if the buildings in question have an energy efficiency rating below the minimum requirement of "E". Furthermore, by 1 April 2023 it will be a similar criminal offence for landlords to continue to let premises falling below the standard to tenants under their existing leases.
Those properties that have been rated F or G under an energy performance certificate will need to undergo sufficient improvement works to raise the energy efficiency of the building to the required minimum and on some of those properties the costs of doing so are likely to be severe.
Steps to be taken by the Prudent Landlord
- First and foremost landlords should identify which if any properties within their portfolio have energy rating below the starting minimum standard and consider what works would be required to bring them up to standard.
- Review your current leases. You will need to check to make sure that you have sufficient reserved rights to access the properties that may be affected in order to undertake the works required and also check whether the tenant is obliged to contribute to any or all of such works.
- Consult your tenants to agree a plan for such works, bearing in mind that unless your lease puts an obligation upon the tenant they are under no obligation to cooperate, but that assuming they are paying for utility costs it may be in their interest to do so
- Take care if granting leases prior to the deadline for affected property that all possible access rights are included in the drafting and where appropriate consider rental or other incentives to prospective tenants who are looking to undertake fit out or refurbishments in return for them undertaking energy efficiency improvement works
For tenants, the position is much simpler; however there are still things to consider to ensure you do not incur unexpected costs:
- The most important thing to do is to identify whether or not your lease makes you responsible for improvements required by law (the most common method of passing on this type of cost is through a service charge).
- You will potentially have to endure the works being done which depending on your business activities could have cost implications such as loss of trade. You should consider the landlords access rights in connection with this and protect your trading activates as much as you are able.
- Future-proof any leases you are entering into; landlords will get wise to these provisions and may seek to pass off some or all of the costs to the tenants. It will be imperative that any future leases are checked carefully to ensure that this is avoided where ever possible.
What can your solicitors do?
This is one of many issues that will bring into sharp focus the importance of properly drafted leases. Between now and 2023 landlords and, in some cases, tenants are going to have to spend money on some of their properties. In some cases how much money may depend on the rights that are reserved for them under the lease or the covenants entered into with tenants. Therefore, your solicitor will need to take great care in drafting any future leases
In addition, the regulations do contain some detailed exemptions the most prominent being where the landlord has no right to access the property to do the works and the lease will continue without renewal or amendment past the deadlines. We can advise on the applicability and implications of such exemptions.
To the future
The regulations provide that the secretary of state must reviews the regulations every 5 years. You can be certain that in the future these regulations will inevitably be tightened further, either by raising the minimum, or adjusting the criteria for each level of rating - after all the government has environmental targets to hit. Only time will tell if these measures will amount to a sensible nudge to ensure landlords have an environmental conscience or if they will eventually become tantamount to an overly draconian environmental tax.
However, one thing is certain, landlords must be continuously aware of the energy efficiency on their existing property stock and future purchases, and make sensible efficiency upgrades - at cost effective opportunities -, to avoid being caught out in the future and ending up on the receiving end of a large bill for upgrade costs.