Following on from its 2023 guidance on the impact of climate change on solicitors, the Law Society has released specific guidance for the property sector.
The guidance addresses the key risks expected to arise in property transactions and discusses how solicitors can act to make clients aware of these and mitigate against them. This plays into a business' ESG (Environmental, Social and Governance) strategy.
Types of risks
The Law Society highlights three categories of risks to be aware of:
- Physical risks
- Transition risks; and
- Liability or legal risks.
Physical risks
Physical risks to property, such as extreme weather events, are becoming increasingly common due to climate change, and can have significant impacts on a range of clients. Property owners must be aware not only of the risk to their own properties, but also of the potential damage to the underlying infrastructure, including vulnerable or strained power networks and frequent environmental disruptions to travel.
These impacts can influence insurability, sales, leasing, development or financing. They can potentially reduce a property's value or marketability or affecting its use and/or enjoyment.
Owners should seek professional advice from competent surveyors and other appropriate experts.
Transition risks
As the UK government has a net-zero goal by 2050, there are likely to be substantial policy, regulatory and legislative changes which impact an owner's interests. Pressure will be put on owners to reduce emissions and improve energy efficiency.
The Law Society highlights that, among the following key regulations and reporting standards which may change and be introduced, the Minimum Energy Efficiency Standard (MEES) Regulations are particularly relevant:
- Building Regulations
- Greenhouse Gas Reporting Requirements; and
- The Future Home and Building Standards.
The requirements under MEES Regulations are expected to become stricter, and the Law Society highlights the risk of financial penalties and reputational damage for landlords if they let property with substandard energy efficiency ratings.
Substandard ratings are currently an 'F' or 'G', which make it illegal to let a commercial property with such a rating. However, it is important that owners are aware of the likelihood of this changing, and their responsibilities and liabilities if it does so.
Additionally, owners must ensure water conservation measures and implement effective waste management systems to comply with the Waste and Water Efficiency Standards.
Liability or legal risks
Liability or legal risks are an actual or potential negative impact arising from physical risks... or transition risks ... which may lead to a legal liability or obligation.
This includes, for example, the potential imposition of planning conditions by the local authority if a proposed development is not resilient to floods, or a foreseeable extreme weather event reducing or removing an owner's ability to enforce its rights of access to a property.
Assessing a client's needs
The climate risk profile will be different in every transaction.
The Law Society highlights some useful initial questions to consider at the start of a transaction, relating to:
- How long the client intends to own or occupy the land
- The intended use of the land - whether for development or let it to third-parties; and
- The client's climate expertise, policies and climate risk appetite.
ESG in government policies is considered a stick-and-carrot approach and, in the coming years, a higher level of sustainability performance and disclosure will be necessary. This means that owners will have to take a careful approach to their ESG Strategy to ensure compliance with legislation but also the financial implications this may create.
'Green' leases are now being introduced to ensure that landlords and tenants can share data about energy performance and to allow a landlord to carry out works to improve the performance of buildings.
Can this cost, however, be passed onto the tenants?
In most cases, not directly, which creates a financial burden for a landlord, but, a property which has lower energy costs could yield a higher rental value. Reports also indicate that regulations may now be encouraging investors and anyone wanting to secure institutional capital should look to demonstrate compliance with as many global standards as possible.
Further, market reporting also indicates that properties with strong ESG credentials are now achieving higher rental values and lower vacancy rates.
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.
