20 January 2020

E by 2023 to B by 2030? BPF says yes

As the Forsters commercial real estate team learnt at a recent quiz, “climate strike” was the Collins Dictionary’s word of the year for 2019. As we begin a new decade, the need to combat climate change will no doubt remain at the forefront of conversation, none more so than in the real estate industry.

Therefore it is not surprising that in one of their first articles of 2020, EG asks “EPCs: Can sustainable offices bolster profits?” In that article, Graham Shone neatly describes how over the past 18 months the industry has “become more vocal about what it needs to do to play its part”. However Shone concludes, at most, “there is no evidentiary commercial downside to ensuring high-level energy performance”. It is surely not a conclusion that will prick the ears of commercial landlords across the country?

Perhaps it is not the promise of higher rents but a little “legal kick” that will call the industry to action? As Shone also reminds us, a consultation is under way on the future trajectory for the minimum energy efficiency standard (currently E, although this will not apply to existing lettings until 2023 in the non domestic sector). We blogged previously on the consultation, which has now closed. The British Property Federation (BPF) has now published its response which, one week into the new decade, is one that should resonate across the industry and fuel (no pun intended) conversation.

In summary, the BPF supports the move to mandate a minimum energy efficiency standard of EPC rating B by 2030, a fixed date without any phased implementation. It also supports mandatory in-use energy performance ratings, acknowledging that EPCs are not an accurate representation of actual energy performance. According to Alex Green, Assistant Director (Development and Sustainability) at the BPF, this will “engender a culture of continuously measuring and improving energy consumption in commercial buildings. EPC ratings alone won’t be enough to ensure improved operational energy efficiency”.

The questions posed by the consultation and the BPF’s enthusiastic response support three predictions for 2020-30, long held by the author. A marked increase in the legal minimum rating, an additional mandatory operational layer to the EPC process (inevitably supported by technological innovation) and the increasing relevance of exemptions. In short, the “legal kick” is almost inevitably coming and the vast majority of landlords will be required to act. As the BPF’s response reminds us, 85% of building stock is expected to fall within the scope of an EPC B trajectory. Taking the words of the BPF, “some of today’s “best in class” investors would fail to meet the EPC B target in many of their buildings” and “the cost implications for building owners/landowners will be significant in many instances”. Changes are set to hit the bottom line for almost all industry players.

Whilst we wait to see whether the government moves in line with the BPF’s preferred approach, there are some other points of note in their response.

  1. In 2023, it will be unlawful to let non domestic property with an F or G rating, unless an exemption applies. As the response notes, there is a significant level of “inertia” (i.e. landlords are simply waiting until nearer the backstop before making improvements). The BPF fears the same will apply to a 2030 backstop and suggests incentivising early action. It proposes two interesting measures. Firstly, aligning business rates liability with energy performance, so incentivising occupants to seek out higher EPC rated premises. Secondly, providing low cost capital for energy efficiency improvements, whether grants or low interest loans.
  2. The response addresses the difficulty around EPCs, minimum energy efficiency standards (MEES) and the “shell and core” scenario, commonly encountered in retail. MEES liability rests with the landlord, but it may be that the tenant’s fit out is required to bring a “shell and core” property up to the lawful standard, before the grant of the lease. The response presents a couple of possible solutions. How about shifting the responsibility for compliance to a tenant that is fitting out, perhaps with the right for a landlord to control the choice of EPC assessor? Or allowing use of draft EPC for leasing, where that draft is based on a proposed fit out? Or a time limited exemption, available where a tenant has committed to carrying out improvement work (perhaps in an agreement for lease) and there is a period of time after completion of a lease to allow for this? Many, lawyers included, would welcome a solution.
  3. EPC B by 2030. The BPF admit it is a “stretching” and “ultimately ambitious” target. As the BPF note, some buildings may never make it, whatever measures may be installed. In turn, demolition and rebuilding is perhaps the inevitable course. However, on one hand you have the desire to see outstanding environmental performance that is most easily achieved through new build structures, yet on the other, demolition simply unlocks carbon already embodied in a building. It is an inherent conflict that the BPF rightfully addresses but one in the author’s view, may be difficult to reconcile. On the same theme, MEES does not exempt buildings earmarked for demolition. There is little point in a landlord having to install improvements if demolition is due, thereby wasting unnecessary additions to embodied carbon. However as the response hints, how do you police a potential loophole?
  4. As above, exemptions are set to play an increasing role and garner more attention. The response highlights one concern that has already emerged. The 7-year payback exemption requires 3 separate quotations for the installation of energy saving measures. However suppliers are being asked to provide quotations in the knowledge that the landlord will not follow through with the work. In turn, suppliers are demanding high fees for quotations. The rule, written in legislation, will almost inevitably have to change.

2020 has started with plenty of sustainability chatter. The BPF have set a positive and ambitious tone. Let’s see how the government respond.

Edward Glass is a senior associate in our Commercial Real Estate team.

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