It has been a while in the making but from April 2018 the Energy Performance Certificate ratings will begin to have a material impact upon the letting of both commercial and residential property.
Previously EPCs have been seen as necessary to be produced and requested upon the grant of a lease. But up until now the contents of the EPC have rarely been of a material concern to either landlord or tenant.
This is to change in April of next year when it will be unlawful for a landlord to let any part of a building which are not, at least, an 'E' rating. It is estimated by the government that approximately 20% of commercial buildings have the lowest ratings 'F' & 'G'.
Current leases of premises which have a rating of lower than 'E' may continue. This will change in five years time when the continuing letting of premises of insufficient rating will be subject to a penalty.
The overarching principle for a landlord is that it should enter into a 'clean lease' i.e. one which requires the tenant or tenants to carry the costs of the building. However, the carrying out of works to meet the minimum energy efficiency standards is a peculiarity in this regard. The RICS code of practice suggests that it should not be a service charge item (note that tenants!) and the standard obligations of statutory compliance and repair do not require a tenant to improve the premises.
It is possible to include express provisions in leases which require the tenant to pick up the costs but it should also be considered that where the leases contain a rent review clause it could be the case that it is viewed as being onerous and will have an adverse impact upon the determined rent.
The regulations do allow for circumstances where a landlord will be excused, such as where consent to access the premises is not lawfully allowed by the tenants. Further a landlord will be excused where it would devalue the property by more than 5%, all cost-effective works have been done, or necessary consents (from third parties or planning authorities) have not been forthcoming. If there is a valid ground then it will need to be formally registered on a public register. Whilst this will shelter the landlord during its ownership it will not assist any purchaser of the landlord's interest in the property.
Therefore, from a landlord's perspective works are likely to be required at its own cost at an appropriate point to underpin the property being able to be let as well as the property's value.
Because the regulations leave the landlord in a position where the costs are upon them and difficult to shift to the tenants, it is advisable that a landlord looks to ensure that a tenant does not do anything to inflict further costs upon them. Therefore, the lease should not allow alterations to be done which may lead to a reduction in rating or commission an EPC which would incorrectly lead to a reduced rating.
Overall, landlords be alive to the consequences of the legislation if it impacts upon your buildings and come up with a plan to insulate its impact the letting of your buildings as well as its value.