From 1st April 2023, all existing commercial leases based in England or Wales, let on a new or renewed lease, will have to meet the Minimum Energy Efficiency Standard (MEES) of an Energy Performance Certificate above F, apart from those on certain listed buildings or short lease lengths of less than six months. By April 2030 these requirements will be tightened to an EPC rating of B.
If industrial landlords don’t future-proof their assets to ensure that they fall in line with these regulations they may run the future risk of financial impact of:
- Not being able to let the property out
- Their property being valued at a lower level
- Less credit availability
- Poor rent reviews
- Substandard dilapidation assessments
- Receiving penalties of up to £150,000.
- Furthermore, local authorities can even enforce action against unlawful tenancies.
Who is responsible for meeting MEES standards, the landlord or the tenant?
The current debate is around who is responsible and who will pay for these EPC updates. It’s imperative that these EPC adjustments are put in place to ensure that the landlord doesn’t receive a hefty fine but it will also ensure that their property is an attractive proposition for investors, tenants, future purchasers and occupiers when they relet. However, this will ultimately mean that property owners are due to incur costs.
Currently landlords are only required to undertake refurbishments that are cost-effective under the seven-year payback test, whereby the expected value of savings on energy bills over that time period equates to, or is greater than, the cost of the measures. If landlords can demonstrate that the commercial property has reached the highest rating possible after reviewing this policy, they may continue to let it.
Some landlords and developers maintain that it should be up to the tenant themselves to pay for any new refurbishments and are in some instances, incorporating this into new leases by way of an increased rent, recovering any expenditure via the service charge. One such claim could be that it is in the tenant’s best interests as it could reduce their future energy bills. However, occupiers argue that its unfair for them to be landed with an additional bill on top of their rent and business rates, which they might not benefit from if they vacate the property – the advantage will be for the landlord reletting the building at the end of their lease.
In addition, landlords have started incorporating legally binding “light green” and “dark green” clauses into heads of terms documents, which are in line with their corporate social responsibility. Light green clauses could be an obligation for the impending occupier not to impact the current EPC rating; the landlord having the right to carry out improvements in the building and a requirement for the occupier to share their utility data to see where improvements can be made.
Dark green clauses may include the occupier needing to ensure that there is waste management site provision on their estate and/or the tenant not being able to change the sustainable BREEAM fit out requirements.
New-build, refurb, net zero
Given the strong market dynamics of the logistics sector, occupiers are increasingly seeking good quality space to increase efficiency savings. In Q1-Q3 2021, 72% of total space acquired was new space and this compares to the 10-year average of 59%. Fuelled also by the lack of space, developers and investors are responding to this increased appetite. Colliers records show that, more than 11 million sq ft of speculatively built space will have been delivered by the end the year (2021).
Most of the new stock coming through, especially big box units, are providing their own take on what net zero carbon looks like. While Prologis and Tritax have produced a net zero white paper for logistics, we are yet to see widespread adoption of an industry standard, as what works for one space may not currently work for all – whether that is access to onsite renewables or the ability to install PV panelling in a manner that provides real benefit.
James Pay, Head of Client Sustainability at Colliers added: “Refurbishment is a vital tool in real estate’s race to net zero. With the retention of structures, careful selection of new materials and modern construction techniques, the embodied carbon of a refurbishment project could represent a 50 per cent saving compared to a new build. Refurbishment can also open up circular economy opportunities, whether through enabling the selection of existing materials for reinstatement during fit out or enabling contractors to find alternative markets for the materials removed, before resorting to recycling.”
Where refurbishment and the associated embodied carbon savings are not practical and more buildings target net zero during the construction phase, as well as operationally, the demand for carbon credits and offsetting will increase and with limited accredited options, this will see a rise in costs over the next few years. This will no doubt pinch the purse strings of the developer/landlord, however, yields on multi let and industrial big box sites will always do better than second and tertiary sites that will find it difficult to generate the requirements needed in 2030. Are we seeing this yield change yet? No because there is huge influx of money in the market however, when the market does turn, and it will eventually, landlords who are aligned now will somewhat safeguard their portfolio and will see less impact.
The MEES regulations aren’t a “nice to have”, they are here to stay and need to be factored into a landlord and tenant’s impending future plans. It is always best to seek counsel from a specialist commercial property lawyer and real estate firm to ensure that you are meeting the criteria and can budget to meet the forthcoming legislation deadlines.