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QD view – To B or not to B

With everything else going on, it feels like the topic of ‘net-zero’ has been pushed down the agenda. However, with new legislation due to come through on the energy efficiency of commercial property, landlords may be sitting on a ticking time-bomb.

The government has set a target of lifting the minimum energy performance certificate (EPC) standard to a B rating from its current E rating by 2030. The Department for Business, Energy & Industrial Strategy has published an open consultation on changes to the Minimum Energy Efficiency Standards (MEES) regulations which proposes a phased implementation that will mean it would be unlawful to let a commercial building with an EPC rating below E from 1 April 2023, a C rating from April 2027 and a B rating in 2030.

The good news is that in the listed property sector, it is safe to assume the vast majority of buildings are already above an E rating. And achieving a C rating is not too difficult and for most reputable landlords they would already be upgrading these buildings as a matter of course, with things such as LED lighting, better insulation, and windows. Also, modelling used to determine a building’s energy performance is much more informed now than it was in the past, so most buildings will be re-rated upwards anyway.

More pressing for landlords, however, is understanding the route to a B rating. This would require things like electrifying heating systems. With huge technological advancements in the energy saving sector expected to come, rushing in today to try to meet the B standard may be wasteful in the long run.

If the government is serious about improving the energy performance of the built environment then tenant co-operation needs to be factored in. Under the current proposals landlords have sole responsibility for compliance with the regulations. This gives them limited levers to place requirements on tenants and presents challenges during lease negotiations. Tenant lawyers will often reject any requirements placed on the tenant to help meet higher energy efficiency standards. This needs to be ironed out before legislation comes into force as this seems to be self-defeating and unfair on landlords.

Improving energy performance will, of course, will require more capital expenditure for those companies with a portfolio on the lower end of energy performance. Estimates from a handful of managers we have talked to range from between 10% and 15% extra per year on normal portfolio capital expenditure spend. It is clear, however, that the value of properties without the requisite energy rating will be impacted. Companies need to be defusing this ticking time bomb now to avoid sitting on stranded assets in the future.

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