Buildings are responsible for nearly 50 per cent of the UK’s total energy consumption. Small wonder this has led to a clamour for buildings to be made more energy efficient. Sustainability, it seems, is now very much a part of the property landscape.
The EU’s Energy Performance of Buildings Directive of 2003 (EPBD), which promotes the improvement of the energy performance of buildings, is being implemented not only in the UK but throughout Europe. It is clear that, although the EPBD has been anticipated for some time and initiatives such as the Building Research Establishment Environmental Assessment Method (BREEAM) standards have already been introduced, these new regulations will have a profound impact on the sector – more so than many are currently anticipating. In England and Wales, landlords and property owners will shortly be required to provide an Energy Performance Certificate (EPC) to any prospective buyer or tenant when they construct, sell or lease a commercial building. This will apply from 6 April for buildings over 10,000sq m; from 1 July for buildings over 2,500sq m; and from 1 October for buildings over 1,000sq m. In Scotland all new buildings have been required to have an EPC since 1 May 2007 and all buildings sold or let will require one from 4 January 2009.
Aside from the immediate impact of EPBD, in the medium to long term EPCs will have a more far-reaching effect on the commercial property sector. In the first instance, governments of all political persuasions rarely collect data for no reason. There is every possibility that, once a national picture of the energy ratings of UK buildings is established, regional or national government is likely to use that data to incentivise greater energy efficiency – for instance through the manipulation of the rating system to reward energy-efficient buildings and punish those that are not. Any manipulations such as this would have a concomitant effect on market value.
It may increasingly be the case that EPCs will influence the capital and rental valuations of properties, as well as their marketability. Tenants, particularly those with a strong corporate social responsibility profile, will be concerned with a building’s energy performance. Those properties with a good rating will be cheaper to run and may attract a premium in the assessment of price or rent. Conversely, those with a poor rating may find themselves the subject of a discount or, worse still, suffering stigmatisation in the market.
Some investors may offload properties that have a poor rating and little prospect of cost-effective rectification due to their age, construction or listed building status – for example, Victorian or Georgian properties in the centre of cities such as Glasgow, Edinburgh or Bristol.
Furthermore, the indications are that EPCs will be used as a negotiating tool for new leases, lease renewals and rent reviews – by the tenant if the property has a poor rating and by the landlord if the rating is good. In sale and purchase transactions after the due date, the purchaser’s solicitor will need to make it a condition that an EPC will be delivered. If one is not available, the seller will need to obtain one quickly (most likely at a premium fee) or accept a price reduction or retention.
Landlords who upgrade a property to ensure it enjoys a better rating will seek to recover their costs from the tenants; the provisions of the lease, particularly the service charge provisions, will require close scrutiny to establish respective rights and liabilities. Compliance with the EPBD may also be an issue in relation to rent review provisions.
As ever with new legislation, uncertainties will arise as the meaning of key phrases awaits clarification. The EPBD is no different, with definitions such as “building” and “relevant person” requiring careful consideration. For example, concerns have been expressed that as a result of the terminology the whole of a shopping centre may become subject to a requirement to obtain an EPC as a result of a transaction (such as an assignment or subletting) involving a single unit.
In the short term, EPCs are likely to cause a great deal of heartache as ignorance of the new regime and a lack of provision disrupts the transactional process. In the medium to long term, the data the EPC, provides rather than the process, will be more critical, as carbon and energy efficiency become significant factors in the mix of what determines a building’s value.
Alan Simpson is a partner in the property department and Mark O’Dowd an operations director at HBJ Gateley Wareing