UK: The "Green Deal" Update And The Impact On The Real Estate Sector

Last Updated: 20 January 2014
Article by Katherine Baker

Summary and implications

In July 2011 Nabarro's Real Estate Update reported on the possibility of regulations being introduced within the following four years to ensure rented properties, both commercial and domestic, met minimum energy efficiency standards (see link to the article right).

Following the implementation of the Energy Act 2011 (the Energy Act) it has been confirmed that the Secretary of State is now legally obliged pursuant to section 49 of the Energy Act to make such regulations to ensure that a landlord achieves a certain level of energy efficiency for a non-domestic, private rented property in the UK before the landlord can let the property.

The regulations must:

  • specify the level of EPC rating required; and
  • be made by no later than 1 April 2018 (the PRS Regulations).

The Green Deal in practice

However, despite the supposed advantages of the Green Deal (both financially to the landlord and environmentally in the hope of reducing carbon emissions), it was reported in Property Week in September 2013 that there had been virtually no take-up for the scheme. This lack of interest is considered to be a direct result of the Green Deal plans offering what has been described by Sarah Townsend of Property Week on 3 December 2013 as the "prohibitively expensive" (circa seven per cent) interest rates and commercial landlords are therefore looking elsewhere for better deals.

Further, it has been mooted that potential buyers may be put off buying properties that are subject to a Green Deal in fear that mortgage lenders may refuse funding. The Council of Mortgage Lenders in October 2012 produced a summary of its policy approach to the Green Deal and confirmed that it would be the market that would determine any impact the Green Deal may have on property values and that each lender would adopt its own policy towards the Green Deal, which would depend on Green Deal take-up.

Rent review

Reports of the possible negative impact the PRS Regulations will have on rent review have also been made. Duncan Preston, a director of valuations at Aston Rose, reported on 27 September 2013 in Property Week that the "valuer now has another uncertain set of risks to include in the appraisal and opinion of value". The question was raised as to whether a hypothetical lease was to be devalued if it is to be based on the same terms as the existing lease when the property in question is below the required EPC rating. This is where the "golden rule" should come into play preventing landlords from being penalised if the property has not reached the minimum rating even after the maximum package of measures have been made to the property that can be funded by the Green Deal. However, they would no doubt add some confusion to the rent review process.

Landlord consents

Unlike domestic private rental property, non-domestic private rental property is not to be subject to a statutory restriction preventing a landlord from unreasonably refusing consent to a tenant to make energy efficiency improvements but it is likely that tenants may seek such amendments to alterations clauses within non-domestic leases. Additionally as more landlords become aware of the implications of the Energy Act, landlords are likely to wish to push the process of improving a property's energy efficiency and/or entering into a Green Deal plan onto tenants. Opportunities should therefore be taken during new tenants' fit out processes and this should alleviate later disruption for the tenant with landlords carrying out works to meet the standards in time and also prevent issues with leases to avoid certain works being undertaken.

There may also be some conflict between leases requiring a tenant to maintain and repair premises pursuant to a schedule of condition and the law requiring the landlord to keep a building marketable by meeting a certain EPC rating. Issues may arise when landlords carry out works but the tenant does not maintain them to the correct standard or the landlord provides capital moneys for the tenant to carry out the "green" works and the works then not being deemed (when later assessed) to meet the required level. Open and clear discussions between the parties will therefore be imperative.

Impact on property transactions

  • As mentioned above, amendments to new and existing leases are likely to be required by implication of the PRS Regulations. However amendments to such documents and also sale contracts may also be required if a property is subject to a Green Deal plan. A buyer, tenant or assignee will need to give an acknowledgement that they are aware that the property is subject to a Green Deal plan and accept they will take over responsibility for future payments of instalments agreed in the Green Deal plan.
  • Going hand in hand with this acknowledgement, a seller, landlord or assignor must disclose the existence of any Green Deal plan affecting the property and there will be penalties for failing to disclose the required information.
  • A property's EPC will set out the required Green Deal information and therefore on production of a valid EPC the disclosure obligation should be satisfied. It will therefore be prudent for a landlord to regularly commission new EPCs for individual properties as the Green Deal information may have changed.
  • Finally, although the details are not clear as yet as to the extent of information to be shown, local land charge searches should start to show Green Deals which may affect a property.

Conclusion

There is no doubt that when assessing the impact of the Energy Act on a wider scale, long term, the forthcoming PRS Regulations and overall aim for the reduction in carbon emissions can only be improvements to the property sector, especially when looking at the opportunities that arise for new buildings. Dr Jon Kirkpatrick, Head of Sustainability EMEA at Lend Lease, has recently spoken at both the October 2013 Nabarro real estate conference and the Young Entrepreneurs in Property Christmas Dinner on the impact buildings have on the changing world. It was stated that cities currently use two-thirds of the world's total energy usage yet they only take up two per cent of the world's land mass. Indeed London's current energy footprint is believed to be about the same size as the whole of Spain's. Therefore, if the buildings that make up cities such as London are forced to become more energy efficient there is no doubt that the effect of the Energy Act will improve the UK's energy impact on the environment. It is also possible that as the concept of sustainability climbs higher in importance in corporate planning terms, competition will increase between developers to provide buildings that are not only compliant with the Energy Act but also provide for the changing nature of occupiers' use of non-domestic properties, especially in the workplace.

However, the immediate and forthcoming impact on the property sector is not so clear and there will no doubt be problems with existing leases involving for example, rent review, alterations and reinstatement clauses. It is hoped however that with the increasing awareness of the impact of the Energy Act any such hiccups will be ironed out prior to entering into any new transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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