**BREAKING NEWS – CALLING ALL COMMERCIAL PROPERTY LANDLORDS**
The green timebomb is ticking.
In actual fact, this should not be breaking news and if it is, you’ve been sleepwalking. It’s time to wake up and smell the carbon emissions because you’ve got work to do.
As any good scriptwriter will tell you, the build-up to a good story needs to be as intriguing and exciting as the climactic ending and this is one story you really ought to stick with right to the very end. In this case, not because you want to see the handsome secret agent overcome the baddie intent on global destruction or if the mad professor can source enough plutonium to power the flux capacitor and get the car up to 88mph.
This is not Hollywood. You want to stick with this one because if you don’t your lovely buildings full of tenants could become lovely buildings with no tenants, and that’s a sad story with sad characters and a grim (and unbelievably expensive) ending.
Of course we’re talking about the Minimum Energy Efficiency Standards (MEES) and Energy Performance Certificates (EPC) in commercial properties.
What Is An EPC?
If you don’t know by now there’s very little hope but in a nutshell, an Energy Performance Certificate is required whenever a property is built, rented or sold and measures the energy efficiency of a property. It contains information about the property’s energy usage and costs and how to reduce both.
The Energy Efficiency Rating on an EPC goes from A (very energy efficient with low running costs) to G (not energy efficient with high running costs).
What Are MEES?
On 1st April 2018, the government introduced Minimum Energy Efficiency Standards regulations that have the very real potential to throw a (literal and metaphorical) spanner in the works. It stated that from that date, landlords could not grant a lease to new or existing leaseholders if their commercial property had an EPC rating of F or G.
MEES were introduced by the government who, in their infinite wisdom, identified the built environment as a major contributor to greenhouse gas emissions and therefore poses a significant threat to the UK meeting its carbon reduction targets. They estimated that 18% of commercial properties were at the F or G rating and while the new building regs ensure that new properties meet – and in many cases exceed – the current standards, MEES is targeting older buildings that don’t.
It didn’t affect existing tenants on long leases so landlords up and down the country collectively said ‘OK, when I need to, I’ll sort it out’ and filed it away in the box marked ‘for another time.’
Well, that time has come, and here’s the bombshell…
From April 1st 2023 landlords cannot continue to let a commercial property that has an EPC rating of F or G.
There are exemptions available and there are certain properties that don’t require an EPC but the vast majority will need to be ship-shape in 18 months from now. Not much of a stretch if you own a small, two-storey unit with four offices, a kitchenette and a couple of toilets but if you have a decent sized portfolio, you’ve got work to do…
For clarity, let’s repeat the bombshell – From April 1st 2023 landlords cannot continue to let a commercial property that has an EPC rating of F or G.
Back in 2018 when the first tranche of legislation was introduced, building optimisation company arbnco performed energy simulations using their proprietary software to examine the EPCs of 3,260 buildings in their database. The result in line with the government estimate was that around one in five buildings (between 18-20%) fell into the F and G ratings.
Extrapolated over the whole country and that’s somewhere in the region of £150 billion-worth of commercial property at risk of being unlettable.
So landlords, is your property portfolio at risk? Do you even know what your EPC ratings are? If you don’t, our professional advice would be to find out, and soon.
But Wait, There’s Another Bombshell…
A paradigm shift is happening in the business of commercial real estate. The same thing is happening in the business of football. No longer do the clubs have the power. If a player wants to move, he will eventually get his wish. Back in 2019, French forward Antoine Griezmann publicly announced his decide to move away from Atletico Madrid by refusing to report for pre-season training and claiming that confronting his jilted teammates would cause him ‘emotional stress’. He got his wish and the club very reluctantly sold him to Barcelona for €120m.
Similarly in the business of commercial real estate, the tenants now hold the power. They now have the opportunity to pick and choose the space they want as where they work is as important as how good they are at what they do. Their space defines their brand. Key words in meetings to decide where to move to are no longer ‘parking’ or ‘kitchen’. They are ‘carbon neutrality’, sustainability’ and ‘energy efficiency’ and if your space isn’t on top of its game, you’ll struggle to attract the Barcelonas of this world and you’ll end up with the Exeter Citys.*
*We intend no offence to the players, officials or supporters of The Grecians, it was just an example. We could just as easily have used Rochdale, Scunthorpe United or Arsenal.
To this end, the government have announced a massive change in the regulatory environment whereby come 2030, all commercial real estate will need to have a B rating on their EPC and currently, between 80-90% of London commercial space is at C or below.
MEES does not apply to:
- buildings which are not required to have an EPC such as industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holidays lets
- buildings where the EPC is over 10 years old or where there is no EPC
- tenancies of less than 6 months (with no right of renewal)
- tenancies of over 99 years
The penalties for non-compliance are:
- for renting out a property for a period of fewer than three months in breach of the MEES Regulations will be equivalent to 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000
- After three months, the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000
Threats & Opportunities For Landlords
The most obvious threat to landlords is the financial whack and potential loss of income if a property can’t be rented. In addition, provisions in existing leases may affect landlords’ statutory obligations , for example:
- If a landlord wanted to delay compliance for as long as possible, standard leases might not contain sufficient restrictions on tenants subletting which may trigger the landlord’s obligations
- lease provisions on service charges, yielding-up, statutory compliance and rent reviews may not allow a landlord to recover from the tenant the capital expenditure required for improvements
- for a landlord looking to make improvements, the landlord’s rights to enter may not extend to entry for installing energy efficiency improvements or there may be restrictions in a headlease to consider
But, so says the estate agents’ bible, what the Lord taketh from landlords, the Lord giveth to landlords. These new regulations also present opportunities.
Landlords can engage with tenants to enter into what are known as ‘green leases’, whereby the environmental management and property costs including energy efficiency improvements and utility bills are shared for both parties’ benefit.
In addition – and this will be music to the ears of every landlord in the universe – there are opportunities to explore the potential to up the rental and asset value of their property portfolio by making energy efficiency improvements and combining them with other upgrades such as new fitouts.
The potential upside of getting the EPCs in your portfolio to A or B in that there is the possibility of a 10% rental uplift which could, potentially, negate the improvement costs.
What Should Landlords Do Now?
The optimum word in the subtitle above is ‘now’. By putting it off, laissez-faire landlords are running a huge risk. One that may cost more than a few months’ rent, so here’s what to do:
- Audit your portfolio so you know for sure which properties are within scope of the MEES regulations and whether or not exemptions could apply
- Get a professional to carry out energy assessments to ensure your EPC ratings are either within scope or not
- Get your head around how lease terms, break and renewal dates and planned refit periods fit in with your own MEES timetable
- Review your leases so you know your rights
The EPC is at the heart of the MEES regulations and what has become abundantly clear is that it has the potential to massively impact value and it offers a broad scope for costly disputes and even litigation with experts for both landlords and tenants making representations on the accuracy of EPCs.
This is not a can that you want to keep kicking down the road. The deadline will be here in the blink of an eye and the evidence suggests that there a plenty of landlords who are not alive to what maybe ahead of them.
The green timebomb is ticking louder and louder…
For more information on these regulations as well as all your central London property requirements, please contact us on 020 7629 1088 or email email@example.com.