What landlords need to know about potential effects of the Energy Act

Nick Marshall, Principal at EMW law firm offers expert advice on the current challenges for landlords around the Energy Act 2011

Landlords in the commercial and private rented sector need to plan for the potential effects of the Energy Act 2011 (the “Act”).

The reason is simple: the Act has placed renewed pressure on landlords to show that their properties have adequate energy efficiency ratings.  Arguably, the legislation that relates to the Energy Performance Certificate (“EPC”) has little by way of teeth, however the Act, is somewhat more robust in its effect.

By April 2018 landlords will be prevented from letting, or continuing to let, property where its corresponding energy rating falls below an “E”.  To put this in to context, it is estimated that 20% of the UK’s property market falls below this threshold, making this piece of legislation a real commercial worry to many property investors as well as occupiers that might otherwise have been entertaining a divestment of their leasehold responsibilities.

In a world of increasing sustainability and a commitment to reducing emissions, the Act on one hand seeks to ensure that landlords are doing their bit to improve or maintain the efficiency of their property.  The Act will also give those that occupy inefficient residential properties the ability to take the initiative and carry out certain types of energy efficiency improvements, regardless of any prohibition to the contrary in the lease.  These changes will be phased in by 2016.

The Energy Performance Certificate, often overlooked and sometimes considered just a necessary evil to getting a deal done, will now have a much greater significance than ever before, especially for that 20% of the market.  EPCs are often generated by reference to desktop evaluations using default data and landlords are seldom surprised if the result is an “F” or worse – directly, it has little effect on rent.  At some time before 2018, that landlord will be prevented from letting or continuing to let that property, and if it fails to take heed of the Act, there will be unlimited financial penalties to pay.  It’s time to look at these EPCs now: landlords get your buildings reassessed, commission proper surveys based on actual data and get your buildings rated as an “E” or better.  A little time and money spent now, may prevent your new letting being stalled and the receipt of your rental income delayed.

Those leases that are already in place when the Act takes effect, will not be exempt.  What is not clear however, is whether energy efficiency works will need to be carried out mid-term thereby restricting the landlord’s ability to continue to accept rent for the remainder of the term.  The Act places the responsibility and cost for carrying out such works on the landlord, but careful analysis of the lease in each case will be needed to determine whether all or any part of this liability and cost has been passed on to the tenant.  Those covenants that deal with items such as repair, alterations, statutory compliance and reinstatement will need to be scrutinised in much greater detail and in multi tenanted buildings, landlord’s should look to their service charge provisions to see if the associated costs can be recovered.  The likelihood is that the landlord will be faced with a responsibility that it has not offloaded and a cost that it cannot recover.

The Act may have more wider ranging commercial ramifications that were perhaps not envisaged when the law makers drafted it.  In addition to the landlord being saddled with responsibility and cost for carrying out energy efficient works, savvy tenants may use the Act and the energy inefficiencies of a building for their own commercial gain.  There are very plausible arguments that a tenant could advance including: having certain elements of a dilapidations claim struck out and more significantly that in a rising rental market, the most the landlord could possibly achieve at rent review would be a nil increase.

Such arguments will compound the effects of the Act on these landlords which may in turn unknowingly put them in breach of their banking covenants.  The position as regards leases that are in place when the Act takes effect cannot be altered, the position will simply need to be managed to achieve the best commercial outcome, but knowing that these issues exist does mean that plans can be put in place.

For new leases that are yet to be put in place, the negative effects on the landlord may be mitigated through taking early advice and putting in place appropriate drafting in the lease.  The Act represents a new piece of legislation, one that has not featured on the radar of many of our real estate clients and their other professional advisers – be up front with your counterparts and to the extent possible mitigate against the risks.  If you don’t, your savvy counterparts are free to take advantage of the situation for their own financial gain.  Deal with the issues now in clear and concise drafting, close off the risks and reduce the chances of ending up in a dispute.  Disputes are a nuisance, they take you away from the more important commercial drivers in your business and they are expensive to run.

EMW website: www.emwllp.com