Increasing sustainability-related pressures are being faced across all areas of the property and built environment sector, ranging from legislative and compliance pressures, increased financial exposure to ‘green taxes’ and increasing resource prices. Two key pieces of legislation UK businesses need to think about are the Energy Saving Opportunity Scheme (ESOS) legislation requiring all large businesses in the UK to undergo a mandatory programme of energy audits in 2015, and the forthcoming Minimum Energy Performance Standards (MEPS) regulations which will restrict the letting of assets with poor Energy Performance Certificate ratings from April 2018. The increasingly onerous environmental legislative landscape in the UK, both through the ESOS and the MEPS regulations, will significantly impact on businesses across all areas of the property sector from the beginning of 2015 onwards. Both of these pieces of legislation require action now to ease the burden and costs of compliance. ESOS – The Energy Saving Opportunity Scheme Approximately 9,000 companies in the UK will be affected by this legislation, and are captured if they employ 250 or more staff, or have a business turnover that exceeds €50m (approximately £40m) and a balance sheet exceeding €43m (approximately £35m). What businesses need to do In simple terms, ESOS requires participants to: Measure their total energy consumption across a 12 month period (wrapping around the 31st December 2014). This includes energy consumed in buildings, transport, logistics (including business travel) and industrial processes. Determine their areas of significant energy use, and ensure that at least 90% of this is covered by an ESOS audit by an accredited auditor or through alternative routes to compliance comprising ISO50001 Energy Management System, or Display Energy Certificates for buildings. Review the recommendations for energy efficiency opportunities across their business at board level, with sign-off of the auditor’s report being undertaken by a Board level Director. Inform the regulator (the Environment Agency) that the business has complied, and then retain the reports and evidence pack to demonstrate this. And if they don't Whilst there is no formal requirement to actually implement any of the recommendations, this legislation is aimed at raising awareness of the often simple energy efficiency initiatives that can reap large financial rewards. Failure to comply with the regulations carries a potential fine of up to £50,000. MEPS - Minimum Energy Performance Standards The Minimum Energy Performance Standards regulations will make it unlawful from April 2018 to complete new lettings of buildings (both commercial and domestic) in England and Wales which do not achieve a minimum Energy Performance Certificate (EPC) rating of ‘E’. The public consultation on the regulations was completed at the beginning of September 2014, and the Government is now taking this forward to formalise the regulations and all the associated details and nuances following the feedback received from business and industry. It is currently expected that the Government will formalise and release the finalised regulations in the first half of 2015. Scope of Regulations Whilst there will be some exemptions to the regulations (for example: Listed Buildings and Places of Worship), their scope and impact will be very significant across all areas of property: Properties with an EPC rating of ‘F’ or ‘G’ will be prohibited from new lettings from April 2018 – although further clarification is pending on the transactional trigger. It is very likely that this prohibition will extend to all lettings (including existing leases) from April 2023. The duty to comply with the regulations will be the duty of landlords (or tenants for any space they themselves sub-let). There is the potential for an escalator mechanism to be built into the regulations (for example: minimum ‘E’ rating in 2018, minimum ‘D’ in 2025, and minimum ‘C’ in 2030). How landlords and tenants are affected The Government intends to impose penalties for non-compliance, set as a percentage of a property’s rateable value. Impacts will include: Marketability of some properties will become impossible unless they are upgraded to meet the minimum standards. Valuations of such properties could be affected if their marketability is diminished. Tenants in ‘F’ or ‘G’ rated properties will have a leverage position over their landlords at rent reviews and lease renewals. Implications for dilapidation assessments may also emerge. Action is required now Landlords need to evaluate their portfolios now, establish their exposure to the risks posed by this legislation and mitigate those risks by developing a programme of building upgrades or disposals. Commencing this programme now will ensure sensible budgetary management and protect their revenue stream – the deadline is now only some three years away. Tenants need to consider in this context the lease terms they enter into which run beyond April 2018. For more specific information about how this legislation will affect your business, please contact David.