New powers granted to the government under the Energy Act 2011 will make it unlawful to let certain buildings by 2018.
All commercial buildings are now required to have an Energy Performance Certificate (“EPC”) carried out by a qualified assessor when they are sold or let out. The EPC gives the building a rating of between A and G based on the energy efficiency of the building.
The changes being brought in under the Energy Act 2011 mean that landlords with the least energy efficient buildings, those with the ratings of F or G, will not be able to re-let those buildings beyond 2018.
It is suggested that the problem currently extends to 18% of all commercial buildings in the United Kingdom. In order to be re-let, those buildings with an energy rating of F or G will require significant expenditure on retro-fit works to bring their energy efficiency up to an acceptable standard (level E or better).
The question that many in the property profession is asking is ‘who will shoulder the burden for such costs?’
It is expected that landlords will seek to rely on the tenant’s obligation to comply with ‘statutory obligations’ to try and get the tenant to pay the cost of such works.
A well-drafted commercial lease should contain an obligation on the tenant to carry out works that are required by law, whether that law requires the works to be carried out by the owner or the occupier. The question that arises is whether a landlord will be able to rely on this clause at the end of a tenancy to require a tenant to carry out retro-fit works that are needed for the landlord lawfully to renew the lease or re-let to a third party.
Landlords hoping to rely on such clauses will presumably seek to include retro-fit works in schedules of dilapidations leading up to the 2018 changes, and are likely to meet strong resistance from tenants. This highly contentious area will undoubtedly end up the subject of litigation and we will have to wait and see how the courts view these issues as case law emerges over the next few years.
From a property owner’s perspective, the Energy Act raises a number of issues for immediate consideration. The value of a landlord’s property portfolio will undoubtedly be affected by the existence of any property with a low energy rating and the likely cost of carrying out the retro-fitting works required to improve the energy efficiency. With these changes on the horizon, landlords should think about the following:
In leases of whole buildings, are the leases correctly drawn up to give the landlord the best chance of full recovery of the cost of any necessary retro-fit works from the tenant?
Where only part of the property has been demised and a service charge is recovered from the tenant, have the service charge provisions been correctly drawn up to give the landlord the best chance of recovering the cost of any necessary retro-fit works from the tenants?
Where any tenant wants to carry out alterations or improvements to the premises, has the landlord considered the impact on the energy rating that those works may have?
Has the landlord reserved adequate provisions in the lease, and any licence for tenant’s works, to require the tenant to reinstate such works and/or obtain new energy efficiency certificates that may be required?
On any application by a tenant to make alterations to the premises, landlords will need carefully to consider whether they can refuse consent where it is likely that the proposed works will reduce the energy efficiency of the premises. Whether the landlord can do so will depend on the wording of the lease and also on a consideration of established landlord and tenant law about ‘reasonableness’. Particular care should be taken by landlords where the tenant wishes to install air-conditioning or supplementary heating systems.
Before granting consent to a tenant’s works, landlords may also consider trying to get the tenant to agree to use certain materials or employ designs which increase the energy efficiency of the premises.
On lease renewals, landlords will need to consider the terms of the old lease carefully and should not seek merely to renew it on identical terms without consideration of the new law.
Landlords who own a number of poor energy efficient buildings should consider selling their portfolio now so as not to be caught out in a few years’ time.
From a tenant’s perspective, tenants will need to pay more attention to the EPC rating of any premises they are considering occupying under a lease. Consideration should be given to the likely costs of any retro-fit works that may need to be carried out. Where there are potential issues with the energy efficiency of the premises, the tenant should seek to place obligations on the landlord to carry out remedial works with minimal disruption to the tenant’s business and to seek to exclude any obligation on the tenant to contribute to the costs of those works.
Tenants already in poorly rated buildings with leases that extend beyond 2018 may want to consider their options, such as seeking to exercise a break clause (if available) or, if appropriate, looking to assign or sublet the lease. Tenants will undoubtedly need to weigh up the potential costs of being asked to retro-fit a building in order to ensure that it complies with the Energy Act 2011 and the potential costs of exercising a break clause or relocating.
At Gregg Latchams, we are happy to offer advice on the implications of the Energy Act 2011 to landlords, tenants and investors. Should you require any further information, please do not hesitate to contact Julian Pyrke on 0117 906 9421 or Ed Pitt on 0117 906 9466.
