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What are the new energy efficiency standards for privately-let commercial property?

POSTED: 16th September 2015
IN: Business news
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Commercial landlords will be legally required to upgrade their properties to comply with new energy efficiency laws by 2018.

The legislation, the 2011 Energy Act, states that all landlords (including both regulated and short-assured residential tenancy types), must ensure their buildings have an efficiency rating of ‘E’ or above in order to lease a property to a tenant.

With nearly 75,000 commercial buildings (approximately 18 per cent of all existing commercial stock) currently having Energy Performance Certificates (EPC) of just F or G, the introduction of the legislation will impact a large number of property investors.

How the legislation affects commercial landlords

From April 2018, any landlord with a commercial property which fails to meet the minimum energy performance standard (MEPS) will be unable to lease their buildings or renew existing tenant contracts. Repercussions for non-compliance include prohibition of letting and an ‘on the spot’ £5,000 fine produced by local authorities.

However, there are a number of benefits for landlords who embrace the requirements of the new legislation.

Benefits for commercial landlords

With energy efficient buildings becoming increasingly popular amongst commercial tenants, property owners are likely to prosper financially from the introduction of the new laws. Not only could landlords charge higher rents for a lease in an energy saving building, but could also benefit from shorter void periods between tenants. With an increasing trend for businesses to focus on sustainability and corporate social responsibility, there has never been better circumstances for commercial landlords to provide energy efficient buildings to their tenants.

Exceptions to the legislation

Some exceptions to the legislation have been put in place to protect landlords and ensure all developments are cost effective as well as energy efficient. If a landlord can prove that upgrades would not be cost effective, then no alterations need to be made. The same rules apply if the measures would reduce the property’s value by five per cent or above. Landlords are also exempt if current tenants have refused to consent to improvement works.

How will the Act be rolled out?

At present the exact roll-out of the Act is unclear, however, three possible options have been put forward by the Department of Energy and Climate Change (DECC):

1) A soft start - meaning only new leases will need to comply with the minimum EPC rating of ‘E’ by 1st April 2018

2) A hard start - affecting all leases from the 1st April 2018

3) A phased introduction - meaning a soft start of 1st April 2018 for all new leases with a hard backstop of 2023 for all existing leases.

According to a paper by Bilfinger GVA, the phased introduction is the Government’s preferred option.

How to improve energy efficiency

There are number of energy efficient measures landlords can take to improve their EPC-rating. These could involve:

  •          Installing energy saving light bulbs
  •          Introducing effective insulation
  •          Embracing solar panels
  •          Investing in double glazing
  •          Draught proofing
  •          Replacing broken seals

However, landlords planning to invest in a property may benefit further by purchasing a building that is effective from the outset. By selecting properties built with energy efficiency in mind, they could save time, money and increase the potential of an immediate tenant. With owners of poorly-rated properties facing increasing pressure to improve the quality of their buildings, the drive towards energy efficiency could soon become standard practice rather than an extra.  

Aldermore is a British bank that can provide property investors with the commercial mortgages required. To learn more about the options available, please get in touch with the team. 

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