UK: Who´s Afraid Of The Big Green Building

As concern about the effects of climate change grows, political attention is increasingly focusing on the question of how buildings can become more energy efficient and reduce their carbon dioxide (CO₂) emissions.

The Quick Reference Compliance table below demonstrates an overall shift from voluntary to mandatory measures. The approach from national (and London) government is that energy efficiency measures are a "must have" and no longer a "nice to have". But what about the property market?

Installing energy efficient and renewable technologies present developers with technical challenges and increased capital expenditure. Developers will seek to recover expenditure on energy efficiency measures from purchasers Issue

and tenants. At this early stage it is unclear to what extent purchasers and tenants will be willing to absorb the costs.

Energy efficient buildings can be attractive to occupiers in a number of ways. Buildings which are more energy efficient have lower running costs, and there is also evidence that they provide more intangible "well-being" benefits (leading to a happier and more productive work-force), as well as their clear environmental benefits.

Many occupiers, particularly the large corporates, are committed to corporate social responsibility and environmental policies which require them to take active steps to reduce their carbon footprint. Organisations are increasingly adopting such policies not only to "do the right thing" but also to differentiate themselves from their competitors for recruitment and market-facing purposes. Such policies will be subject to greater scrutiny in future as quoted companies are now required to report on performance against their own internal environmental policies. Since 1 October 2007, quoted companies must include in their annual business review information about environmental matters, including information about their environmental policies and the effectiveness of such policies. More sustainable and energy efficient buildings will help them meet these commitments.

Large organisations whose electricity consumption is above 6,000 MWh per year are also having to prepare for the incoming Carbon Reduction Commitment scheme which will engage them in mandatory emissions trading from January 2010. (See Linklaters client publication, Controlling Carbon… the Carbon Reduction Commitment July 2007). This is another source of pressure on occupiers to reduce their energy use, making energy efficient buildings more attractive.

Both developers and occupiers may seek a standard of energy efficiency in their buildings well above what is required by law by way of protection against future tighter legislative requirements, volatility in energy prices and the uncertainty of the actual physical effects that global warming will have on our cities and spaces.

There is also speculation that clear scientific evidence of climate change opens the door to a new head of tortious liability. We are all fixed with knowledge of climate change. Developers, consultants, directors, employers and others who fail to take climate change risk into account in their decisions about their buildings and their business may expose themselves to future claims from those who have suffered loss arising from global warming.

Energy efficiency requirements for buildings are largely driven by European Union legislation, particularly the Energy Performance of Buildings Directive.

See the box below for a summary of relevant provisions.

An EPC is a certificate prepared by an accredited energy assessor recording the energy efficiency of a building according to a set of standard assumptions about energy usage. It rates the building on a scale of A to G, where A is very energy efficient and G is very inefficient. A recommendation report accompanying the EPC sets out measures which could improve the energy rating of the building. An EPC will be required whenever a building is built, sold or rented out, and will generally be valid for ten years.

On sale or lease of an existing building, the seller or landlord must provide an EPC to prospective purchasers or tenants at the earliest opportunity, and no later than whichever of the following occurs first:

• when any written information about the building is provided in response to a request for information received from the prospective purchaser or tenant; or
• when a viewing is conducted; or
• if neither of those occur, before entering into a contract to sell or let.

It is the responsibility of the seller or landlord to ensure that the actual purchaser or tenant receives a valid EPC. No EPC need be provided if the seller or landlord believes that the transaction is unlikely to go ahead (whether because the seller or tenant has insufficient funds, no genuine interest in the building, or because the seller or landlord does not wish to proceed with that person or organisation).

On construction of a new building, the person carrying out the work must obtain an EPC and provide it to the owner. The building control inspector cannot sign off the completion certificate until this has been done. The person carrying out the work must also obtain an EPC if a building is

• converted into fewer or more units; and
• there are changes to the building’s services such as heating, hot water, air conditioning or ventilation.

There are some exemptions to the requirement to provide an EPC, but these are narrowly defined.

The requirement to provide an EPC is being introduced as follows:

From 6 April 2008, display energy certificate showing annual operational ratings, based on energy consumption, must be displayed in large public buildings. A large public building is one which:

• − Has a total useful floor area over 1000m² ; and
• − Is occupied by a public authority or an institution providing public services to a large number of persons where the public frequently visit the building.

The BPF’s Landlord’s Energy Statement (LES) (www.les-ter.org) is a tool developed to assist landlords and managing owners of office buildings in meeting their obligations under the Energy Performance of Buildings Directive. It helps landlords understand and calculate the energy used in providing communal services to their buildings and enables the energy efficiency of the services to be benchmarked against the appropriate sector. The LES is also useful to any tenants displaying display energy certificates from April 2008 as it will provide energy information about their landlords’ services.

The Department for Communities and Local Government (DCLG) has set a target for all new homes to be zero carbon by 2016. ( Building a Greener Future: policy statement 23 July 2007). A zero carbon home is one with zero net emissions of CO₂ from all energy use over the course of a year, including energy from appliances but not including embodied energy (energy used in construction and materials). The standard assessment procedures for calculating domestic energy efficiency are to be revised so that the calculations take appliances into account.

The target is to be met by incorporating the energy efficiency standards of the Code for Sustainable Homes (see below) into the Building Regulations, tightening requirements in relation to insulation, ventilation, air tightness, heating and light fittings. The energy efficiency performance standard of the Building Regulations would be improved in three steps: by 25% in 2010, by 44% in 2013 and up to the zero carbon target in 2016.

Recent guidance on the Code for Sustainable Homes (see below) is causing concern in the market as it makes it harder to use off-site renewables to achieve carbon neutrality. The previous position was that some off-site renewables which were not connected to the site would have been acceptable. The latest guidance, however, states that off-site renewables will only be acceptable if connected to homes by private wire. Note this does not apply to off-site renewables for heat which remain acceptable.

The DCLG is currently reviewing existing commercial building stock to identify appropriate energy efficiency measures and has promised a timetable and action plan for substantial carbon emissions from non-residential buildings over the next ten years.

The Code for Sustainable Homes is a voluntary measure introduced by the Government to help achieve its target for all new homes to be zero carbon by 2016. It has applied since April 2007 and is accompanied by recently revised Technical Guidance for the Code for Sustainable Homes. It only applies in England.

The Code sets standards for a range of environmental impacts, including energy efficiency, water efficiency, waste and sustainable construction materials. The Code awards up to six stars to new homes, according to their performance against nine sustainability criteria. Level 6 of the Code is equivalent to a zero carbon home. Where the requirements of the Building Regulations cover similar impacts, the minimum standard in the Code is equal to or higher than the equivalent Building Regulations requirement.

The DCLG is currently consulting on how a rating system based on the Code might be mandatory for all new homes from April 2008. This would not require developers to have all new homes assessed against the Code. Instead, new homes would be rated to indicate whether they had been assessed, and, if so, the level of performance achieved. The consultation closes on 23 October 2007.

The European Commission is proposing to introduce a similar system to the Code across the European Union.

Budget 2007 announced a stamp duty land tax relief to apply to new homes built to a zero carbon standard. Regulations introducing the relief are expected to contain a detailed definition of zero carbon. The relief is to apply from 1 October 2007 until 30 September 2012. The Finance Act 2007 provides for regulations to be made by the Treasury. Following consultation on draft regulations earlier in the year, the 2007 Pre-Budget Report confirmed that regulations would be laid before Parliament later in October.

The DCLG consulted earlier this year on a draft planning policy statement (PPS) giving guidance to local authorities on how the planning process should help to "shape places" with lower carbon emissions and greater resilience to the effects of climate change ( draft Planning Policy Statement: Planning and Climate Change). The draft PPS requires local authorities to consider the energy performance of a proposed development and sets out a framework for achieving zero carbon homes. The final PPS is due to be published later in 2007.

One significant issue raised by consultees was how to resolve the tension between national energy efficiency measures, currently imposed through Part L of the Building Regulations, and local requirements imposed by local authorities through the planning process, which are often more demanding. The DCLG view is that measures should continue to be set at a national level but that local authorities should have the flexibility to set local standards where appropriate. However the DCLG intends to discuss this further with stakeholders before finalising the PPS.

There has been press speculation that the PPS on Climate Change would abolish the "Merton Rule", referring to local authorities’ policies requiring a proportion of a proposed development’s energy needs to be sourced from on-site renewable energy. However, the DCLG has denied this, and has stated instead that the local authorities will be expected to promote a greater use of renewable energy.

In May 2007 the DCLG consulted on proposals for changing permitted development rights so that householders could install microgeneration technologies without applying for planning permission.

The DCLG has now also commissioned Entec to draft legislation for similar changes for business premises.

Buildings in London are subject to an additional layer of oversight in the form of the Greater London Authority and the Mayor of London. Throughout Ken Livingstone’s tenure, energy efficiency has been high on his agenda for buildings and the specific energy efficiency policies he has set are demanding:

• Mayor and local authorities to require major new developments to demonstrate on-site renewable energy technologies wherever feasible;
• Mayor expects planning applications referred to him to include combined heat and power (CHP) and community heating wherever feasible;

• Mayor and local authorities to request an assessment of the energy demand of major new developments and demonstration of the application of the Mayor’s energy hierarchy;

• Mayor expects planning applications referred to him to supply at least 10% of the development’s energy needs from on-site renewables where feasible, and to incorporate energy efficient technologies where feasible;
• Mayor expects local authorities to install at least one zero carbon development;
• Local authorities to identify Energy Action Areas with higher energy efficiency standards for new build and retrofit;
• National targets to reduce carbon emissions by 60% from 1990 levels by 2050 adopted for London.

• Tough new carbon reduction target to stabilise carbon emissions at 60% below 1990 levels by 2025.

• Mayor and local authorities to require all developments to show that heating, cooling and power systems have been chosen to minimise carbon emissions;
• Mayor expects all major developments to show that in choosing heating and cooling systems, CHP/CCHP (combined cooling heat and power) systems have been given priority;
• Mayor and local authorities to require developments to supply 20% of their energy needs from on-site renewables.

Where next?

Much of the burden of energy efficiency obligations currently falls on new residential buildings. Critics argue that more should be done to address the energy efficiency of commercial buildings and existing building stock. Government has various ongoing projects focusing on these areas, some of which have yet to be translated into concrete proposals.

Although some may feel that the construction industry is unfairly overburdened with expensive obligations to reduce our national carbon footprint, there may be comfort in the certainty that this is all going in one direction: ever-increasing pressure to reduce carbon emissions.

© Linklaters. All Rights reserved 2007

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors.