Real Estate IHL Series ' Wait, What?

• Published date: 26 July 2021
• Subject Matter: Real Estate and Construction, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Real Estate, Landlord & Tenant - Leases
• Law Firm: Shoosmiths
• Author: Ms Anna Lowe and Michael Callaghan

As we emerge from lockdown, the pace of change in the real estate world is increasing once again. Michael Callaghan looks at what the legal landscape looks like in the coming months.

Climate change

The Government is planning significant changes to the Minimum Energy Efficiency Standards (MEES) and the provisions that apply to Energy Performance Certificates (EPCs) to drive down carbon emissions from buildings.

• Currently letting property with an EPC rating below E breaches MEES unless an exemption applies. From 2030 this will apply to lettings with a rating below B.
• There will be a new obligation on property owners to renew EPCs when they reach the end of their ten-year lifespan so that there is always a valid EPC for a property.
• Two-yearly compliance windows for MEES will be introduced with all exemptions from MEES being reviewed at the end of each compliance period.
• On shell and core lettings, the tenant's works can have a major impact on the EPC rating. Therefore, tenants should bear some of the responsibilities for complying with MEES.
• It will be easier to apply of an exemption where works are not cost-effective. The obligation to obtain three quotes for the works will be removed and there will be a new payback calculator to determine whether the exemption is met.

For property owners, these proposals are inevitably going to increase compliance costs. Landlords will have to review their portfolios to determine if they will be adversely affected by the new proposals and look to schedule improvements to bring buildings up to an EPC B rating. Whether or not some of those costs can be passed on to the tenants will depend on the terms of any existing lease where the property is already let.

New leases will need to be negotiated in light of the proposed changes. Landlords might argue that the tenant should pay for any future energy efficiency improvements as they will reap the benefit of lower energy bills. Tenants will argue that the landlord should bear the cost as it will enjoy a greater benefit through increase in the capital value of and the continued ability to let the property.

Annual Energy Usage

An EPC measures only anticipated energy usage and efficiency. To show actual energy usage, the Government is proposing new procedure to monitor actual energy use commercial property over 1000 m2. This will be introduced for office buildings initially but will be extended to other types of property is due course.

• Qualifying properties will need to register...