New energy ratings on Commercial Properties from 2018

Nick Corker, Head of Professional Services at Vickery Holman

Nick Corker, Head of Professional Services at Vickery Holman Property Consultants writes:

From the 1st April 2018 it will be unlawful to let or renew the lease of any commercial property that has an Energy Performance Certificate (EPC) rating lower than an ‘E’.

Furthermore, from April 2023, all tenanted commercial properties will also be subject to the new requirements, unless they can demonstrate an exemption.

Exemptions are applicable, but not limited to, the following situations:

The works required to improve a building’s EPC to at least an ‘E’ Rating costs more than the predicted energy cost savings over seven years;

If third party consent to any improvements is required but not granted;

If an expert provides written advice that the improvements will reduce a property’s value by 5% or more;

The lease term is six months or less, however two consecutive leases of six months will trigger the requirements for the regulations;

Leases of more than 99 years.

Properties with exemptions will only be valid when recorded on a public register. They will expire after five years and cannot be transferred to new owners when a building is sold.

The Government believes that the new regulations will affect approximately one in five buildings but we anticipate this ratio will be higher in the South West.

The implications of this Legislation will be far reaching for both landlords and tenants and we anticipate that in the early stages disputes will arise between parties regarding who will be responsible for any upgrading works.

Although some improvements are straightforward and can be implemented at minimal cost and disruption, it is anticipated that some parties will need to incur significant costs to comply with this legislation.

It will be of no surprise that substandard buildings are less attractive to tenants and accordingly rental and capital values will be adversely affected. Valuations and lease renewals are already being affected as parties consider the effect of this major shakeup on the rent and the ability to let the premises beyond 2018. As we approach the 2018 deadline the effect of the new regulations will be felt at rent review.

It is also important to note that EPC’s are only valid for ten years and therefore some buildings will see a lower rating than currently recorded on re-certification because of changes to methodology and because an existing certificate does not take into consideration recent alterations made to a property.

The regulations will be enforced by Local authorities, assisted by Trading Standards with fines being linked to rateable values ranging from a minimum of £5,000 to a maximum of £150,000!

As a final word of warning, it is conceivable that the minimum EPC Rating of ‘E’ will be raised to say a D/C in the future so it may not be cost effective to merely facilitate the minimum work required to improve a property to an ‘E’ when for relatively little more cost a higher rating can be achieved.

The new regulations are a game changer in the commercial property market and we strongly recommend both landlords and tenants keep in close contact with us here at Vickery Holman so we may not only keep you well informed as to how the proposed changes will affect you but also so we may provide you with cost effective solutions.