Government shapes details for energy action on commercial rented property

The Government has just wrapped up a consultation programme around energy action on commercial rented property.

The consultation period on the detailed secondary regulations for the Energy Act 2011 ends tomorrow and the Department of Energy and Climate Change (DECC) topped out the discussion period with a series of webinars over the past week or so.

Driving this is the need to flesh out the detailed framework on minimum energy standards for landlords of commercial property. The Energy Act has set a deadline for energy efficiency to be in place by April 2018.

As we’ve discussed in the past few months, the legislation will have a huge impact on many commercial landlords as poor energy ratings could prove costly for more than a third of UK commercial properties.

It seems to make sense for landlords to make moves now to make sure their properties are energy efficient and have the necessary certification well ahead of the legislation.

DECC advises that the reasoning for the legal strategy is that non-domestic buildings are responsible for around 12% of UK emissions through heat and power while around 60% of today’s non-domestic buildings will still exist in 2050.

But a big barrier to energy efficiency improvements in rented property (both commercial and domestic) is the split incentive between landlords and tenants – who will take action that benefits all parties?

And while standards are in place to tackle the performance of new buildings, there is a need for a trigger to make improvements to existing stock, hence the Act and detailed regulations in process.

What is very clear from the consultation exercise is that landlords will have to act, and sooner rather than later. While the main focus is on ensuring that all commercial properties achieve a minimum energy efficiency standard, based on the Energy Performance Certificate (EPC), the current proposals underline the need to measure and make necessary efficiency changes in all properties.

For example, should it be costly for a building to reach the minimum ‘E’ EPC rating, a landlord has the option to only install those measures that are cost-effective and one test for this is the Non-Domestic Green Deal.

However, the Government proposes an alternative test of what is cost effective. Besides delivering similar carbon savings, the new test must be:

• Simple – it must be easy for landlords and industry to understand when a building is compliant
  
• Low burden –ideally any finance test should work with existing mechanisms (e.g. commercial loans) and draw on existing information that landlords possess (such as EPCs)
  
• Consistent–ideally there should be consistency either with existing practices.

DECC is also working on ways to provide a wider and more flexible range of financing for energy efficiency programmes as the consultation exercise has revealed concerns about the complexity of the Non-Domestic Green Deal, and concerns around certainty of compliance with the regulations.

The upcoming regulations should provide a clear alternative for landlords who have no intention of using Green Deal finance and so do not wish to pay for a Green Deal assessment but can use an existing EPC.

DECC is also considering a framework for exemptions where there are difficulties in implementing an energy efficiency programme. One example would be when a tenant refuses permission for improvement work or unreasonable conditions are attached. Currently, the thinking is to grant a five year exemption or when the tenant vacates the property if before then.

DECC should be reporting the detail of the draft regulations shortly and share them with interested parties for technical and legal comment as well as holding workshops.