This post was written by Nav Sahota, Siobhan Hayes, Maricela Robles Garza and Daniel Kyriakides.
There have been so many green initiatives from the UK government that it can be hard for companies owning or occupying property to work out what is really going to affect them and their bottom line. We are of the view that UK property owners and many occupiers are gradually going to implement more energy efficiency measures in their buildings. Some of the highest profile corporate occupiers have on-going programmes for reducing power consumption and improving their impact on the environment but others may be persuaded by the costs savings or required by some of these new laws and regulations to turn green (or at least pale green).
EPC Ratings – Investors of buildings which are let to multiple occupiers or have a long term tenant in them may not think of carrying out works to improve the energy efficiency of the building unless these are recoverable under their service charge provisions. Not all service charge clauses allow for the costs of improvements to be recovered.
However carrying out energy efficient improvements may help owners avoid the looming issue of buildings no longer being lettable where they have a low EPC rating. We posted on this topic back in April 2012 and it remains the case that from April 2018, it will be unlawful to rent out a residential or business property that does not reach a minimum energy efficiency standard (expected to be EPC rating ‘E’). It now appears that even pre-existing lettings might become unlawful in April 2018 but we await draft Regulations to be sure.
The impact on marketability and value will gradually become more significant as we get closer to 2018. Some occupiers will not take leases with EPC ratings of F and G already. Portfolio reviews now will show investors where their issues lie in time to plan for the works to be carried out to improve any EPC ratings of F and G before 2018.
Reporting Greenhouse Gas Emissions – Many large scale corporate occupiers already report their carbon footprint (or at least some of it) through the CRC (Energy Efficiency) Scheme but there is now a legal requirement for UK incorporated companies whose equity share capital is listed on the Main Market of the London Stock Exchange (or in an EEA State or admitted to trading on the New York Stock Exchange or Nasdaq) to report their greenhouse gas (GHG) emissions under the Climate Change Act 2008. There is a commercial driver for many other UK companies to do so and many carry out voluntary reporting through projects such as the Carbon Disclosure Project. For anyone searching for detailed guidance on reporting GHGs, DEFRA have issued reporting guidelines.
For UK property investors we foresee pressure from occupiers for information on energy efficiency as well as GHGs.
Green Deal – We are not seeing any significant take up of the Green Deal under which building owners and occupiers can fund the costs of energy efficiency works by borrowing the upfront costs and paying back through energy bills funding the loan repayment costs through energy savings. Owner occupiers may be able to make this work but for leasehold properties there will be a hurdle in the approvals process (in addition to the normal process of getting consent to carry out alterations) as the landlord will want to assess any risk of it having to fund the loan repayment through the energy bills at the end of the lease if the property cannot be re-let. We do not know what will happen if the property is empty and no electricity is consumed but green deal costs remain outstanding. It remains to be seen when and how the Green Deal will really take off but in theory it could be used to fund the improvements needed to upgrade a building’s EPC rating.
The future – Owners or occupiers of property will find it increasingly difficult to ignore green initiatives as Edward Davey of the Department for Energy and Climate Change emphasised by his comment on the report on the UN Intergovernmental Panel or Climate Change
‘the Earth’s climate has warmed over the last century and man-made greenhouse gases have caused much of that global warming. The gases emitted now are accumulating in the atmosphere and so the solutions must be set in motion today. The risks and costs of doing nothing today are so great, only a deeply irresponsible government would be so negligent’.
UK Government policy remains to reduce the UK’s GHGs by at least 80% (from the 1990 level) by 2050. Even if doing your part of this is not currently high on your priority list, companies will need to find the right balance taking into account the initial costs of taking action (and who to allocate this cost to) and the long term effect of improving the energy efficiency of the property you own or occupy, which may result in long term reduction of energy costs and fewer GHGs.