Potential consequences for properties with an EPC level below E.

Some Landlords of commercial properties in the City have been struggling with void periods, tenants going bust and  on going business rates liabilities on empty units, however, there could be more bad news on the way.

Section 49 of the Energy Act 2011 (which is not yet in force) could have severe implications for the letting of many commercial properties. Summarised it says that commercial properties must be made more energy efficient with a requirement that the EPC rating is improved to a prescribed standard, likely to be at least a rating of E. The Act provides that regulations must be made by the Secretary of state by 2018 making provisions to prevent the grant of a lease if the property falls below the required EPC rating.

So far there are no draft regulations yet published.  The Department of Energy & Climate Change believe about a fifth of commercial properties with energy certificates will be affected.  However, the Government believes that landlords will not be faced with up front costs and will be able to finance any improvements needed through the Green Deal or the Energy Company obligation.

Landlords will need to perform this obligation by either reaching the mandatory standard or carry out the maximum improvement measures funded under the Green Deal. The Green Deal is a recent Government initiative to encourage owners of property to make energy saving improvements, without having to pay out an initial sum of money to do so.  The costs of the improvement works, plus interest, are paid through electricity bills over a period of time.

As soon as the regulations are in force all properties with a rating below that required by the regulations will be in breach, this is the reason given for the delay in making regulations, the idea being that landlords now aware of these provisions will be making changes in their properties as tenancies end. In the vast majority of leases a commercial tenant pays the electricity charges in addition to the rent, however, if these have been increased by Green deal improvements this will probably affect rent levels and subsequent rent reviews. Properties with poor EPC ratings could therefore become less attractive to new tenants and provide a lower return to landlords.

Arguments have been made for a ‘soft start’ to give property owners time to meet the new regulation. This means they would only be in breach the next time the property is let. The problem is many existing commercial leases will go beyond 2018 and therefore will be caught by the new regulation.

It is important for landlords and tenants to be aware of the issue and to monitor how it progresses.

If you have any commercial property questions, please contact Clare Magill, Partner on 01752 292354 or email cmagill@wolferstans.com.

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