Energy Efficiency Measures for Commercial Property: What Landlords and Tenants need to know
The UK Government has recently introduced a number of energy efficiency measures which impact occupiers and owners of commercial property. We set out below a brief summary of how these affect landlords and tenants and what these changes may mean.
Heat Network (Metering and Billing) Regulations 2014
Landlords are required to provide information about their multi-let buildings’ communal heating / cooling systems to the National Measurement Office by 31 December 2015, with update obligations every 4 years.
Landlords are required to install meters to measure the supply of heat and cooling to individual occupiers (tenants) by 31 December 2016.
There is no exception to a landlord’s installation duties where a tenant refuses to consent to the necessary works (although the landlord’s rights in the lease may permit entry to carry out the works). Certain exceptions are available if carrying out the duties is not cost effective or technically feasible.
These regulations are subject to criminal penalties (including potentially unlimited fines). Civil sanctions may be applied as an alternative in certain circumstances.
Bills issued by landlords to tenants will be based on actual consumption by the tenant and must satisfy certain minimum requirements. Tenants are therefore encouraged to become more energy efficient.
Minimum Energy Efficiency Standards (MEES) for buildings
From 1 April 2018, a landlord of a commercial private rented property will not lawfully be able to grant a new tenancy of a property with an Energy Performance Certificate (EPC) rating of below E (unless an exemption applies). The Government estimates that at present, nearly 20% of office premises do not achieve an E rating. The grant of a new tenancy extends to letting the property as a result of an extension or renewal of an existing tenancy.
Existing leases must comply with the MEES by 1 April 2023.
A landlord who fails to comply will be subject to a civil fine. It is not clear whether these penalties could be applied on successive occasions (e.g. on each occasion that the landlord grants a lease of different units in a building). This uncertainty is also important, as after 1 April 2023, the landlord will be continuously in breach if it "continues to let" property which does not reach the MEES.
While the cost of the improvements is likely to fall principally on landlords, some service charge and indemnity clauses found in leases may be wide enough to pass costs through to tenants. In practice, however, it is likely that many improvements will be done at the time of a new letting.
Tenants will have to address energy efficiency shortcomings if they are planning to sublet.
Lease negotiations are likely to become more complex, as there is currently nothing in the MEES regulations which provides guidance as to how costs should be shared between landlord and tenant.
Energy Savings Opportunity Scheme (ESOS)
All energy use in buildings is included in ESOS, a mandatory energy assessment which will affect all large UK undertakings (an ESOS Assessment). A ‘large undertaking’ is defined in the ESOS regulations as one which employs at least 250 people or has an annual turnover of €50 million and an annual balance sheet total over €43 million. In relation to multi-tenanted buildings and landlord-tenant relationships, the responsibility to include energy within an organisation’s total energy consumption calculation is determined by whether the ESOS participant is: (i) supplied with that energy; and (ii) consumes that energy by the assets it holds or by the activities it carries out.
A landlord who supplies energy to a tenant under an agreement need not include that energy in calculating its total energy consumption under ESOS, provided that the amount of energy is measured (e.g. by a sub meter).
The landlord and tenant should determine between themselves who is responsible for the energy consumed based on the above. However, where a landlord provides energy to the shared parts of a building, the landlord must include that in calculating its total energy consumption.
If the landlord of a building, under the terms of a lease, does not have access to or control over the use of the tenanted areas of the building, then they cannot act upon recommendations relating to the tenanted areas as part of their ESOS Assessment.
To date, there has been no specific guidance provided in relation to occupational leases or long leaseholds.
Tenants will be responsible for their own energy consumption and compliance with ESOS.
Recommendations under an ESOS Assessment are limited to measures that are within the tenant’s ‘operational control’. If a tenant does not have the right to modify certain areas of its occupied property, recommendations under an ESOS Assessment relating to these areas would be considered outside the tenant’s ‘operational control’. For example, if a tenant is unable to modify windows but an ESOS Assessment recommends double glazing be installed, this would not be considered a valid recommendation for the tenant to act upon.
These changes could have significant implications for landlords and tenants alike, including management time and costs, plus exposure to criminal penalties.
For further information, please contact Caroline May or Jacqui O’Keeffe in the Environment and Safety Team.