15/03/2013

Commercial Property e-Brief – It’s not easy being green!

In these uncertain economic times, it would be easy to think that green issues are off the agenda with investors devoting more time to filling voids and considering the perennial problem of slow growth.  The sector is, however, slowly coming to terms with sustainability issues, whether through a greater awareness of the impact of climate change or through increasing government intervention.

From April 2018, the Energy Act 2011 will make it unlawful to let residential or commercial properties which do not meet a minimum energy performance standard.  Although a final decision has not yet been reached, early indications suggest that this will catch properties with an EPC rating lower than “E”.

WHAT DOES THIS MEAN FOR YOUR BUSINESS?

Property owners need to be looking at their portfolios, as it estimated that almost 20 per cent of commercial properties have the problematic “F” or “G” status.  As we start to approach 2018, we expect to see the value of these affected properties drop as they effectively become unlettable.  At best, landlords would take lower rents and see an increased number of void premises as tenants continue to be driven by green issues.

The market is already starting to see high-profile tenants looking to incorporate green clauses into their existing leases to protect them going forward as the new legislation is implemented.  Marks and Spencer has recently reported deals it has struck to include green provisions in their leases which will encourage the more effective management of a building’s environmental performance.  We suspect this news will see tenants increasingly looking to their Landlords to accommodate their wishes on green issues.

WHAT CAN YOU DO ABOUT IT?

A lot can happen in five years and the proposals may change but landlords have been given time to act and it would be prudent to address the issues before 2018 is upon us.  Investors ideally need to be considering sustainability issues in their business plans over the next 12 months so that any future income stream is not hampered by those affected properties.  The earlier they start to consider the potential impact, the easier it will be to spread the cost of any required expenditure over successive financial years.

One straightforward step is to check your EPCs and recommendation reports and establish the cause of any low ratings.  It may well be that your current tenant’s alterations are a contributing factor and you may have the ability in the lease to require them to remove their fit-out at the end of their tenancy.

Landlords can start conversations with their managing agents and other advisers to see if any improvements can be made to their buildings prior to 2018.  Such costs may be recoverable through the service charge.

Property investors should also pay greater attention to green issues on any new acquisitions they are making.  The EPC ratings and recommendation reports are of real relevance now and will prove to be effective tools in highlighting any potential future expenditure.

HOW CAN GORDONS HELP?

We understand our clients may be anxious about how the potential changes will affect their portfolios.  We have a dedicated Renewable Energy Group comprised of specialist advisers across a range of disciplines and we are able to conduct reviews of your existing documentation and management / service charge structures to recommend improvements.  In particular, we can look at your standard leases to identify whether any potential costs of improving the energy ratings of your buildings are recoverable from your tenants through the service charge.

The saving grace is that our clients do have a number of years to mitigate any surprises on the horizon.  Prudent investors will be conscious of any concerns in their portfolios and by taking steps early on, can reap the rewards of energy efficiency improvements through the resultant savings on utility bills.

 

If you would like to speak to someone about our “Compliance with the Green Property Code” initiative, please contact a member of our Renewable Energy Group.