Landlords and tenants may face problems when letting or renting commercial buildings with a poor energy efficiency rating after 2018
The Private Rented Sector Regulations, which will flow from the Energy Act 2011 (the “Act”), are intended to improve the energy efficiency in both residential and commercial buildings.
Unfortunately these regulations are not yet published which, given that the Act has wide reaching implications for a large number of commercial properties, means that landlords will look to implement the spirit of the regulations without seeing the detail.
In essence, under Section 49 of the Act, landlords wishing to let a commercial building after April 2018 must ensure that it has a minimum efficiency rating which, the Department for Energy and Climate Change has suggested, will be an E rating.
The only exception is if the building in question cannot be improved beyond an F rating in spite of the landlord doing everything they can to improve the energy rating.
1. Implications for tenants
The majority of commercial leases currently in place will continue beyond April 2018 and will therefore potentially be caught by the regulations which do not yet exist.
The impact of the regulations is relevant in a number of different aspects of such leases:-
Rent reviews may be affected by the energy efficiency of the property; a greater energy efficiency rating is likely to have a positive impact on rental value,
Landlords may be able to pass on the cost of improving the energy efficiency of the property to their tenants; the majority of leases contain an obligation to undertake works required by statute which may extend to obliging a tenant to carry out the improvements necessary to ensure compliance with Section 49 of the Act.
It is not clear whether an assignment of a lease will be caught by Section 49 of the Act such that a tenant wishing to dispose of his lease to another will need to bring the property up to the requisite rating first. Underlettings are likely to be caught.
It is not clear whether leases of properties with an F or G rating will become void for illegality in April 2018 (on the assumption that the minimum rating is set at E).
This should become clear with the draft regulations. If the lease does become void for illegality and a tenant continues to occupy and pay rent this may have an impact on security of tenure, registration at the Land Registry and payment of stamp duty land tax.
2. Practical steps for tenants
Tenants should ask to see the Energy Performance Certificate and recommendation report for a property early on in a lease transaction. If the property is F or G rated, tenants should take specialist advice to consider the impact of this on the rental value of the lease or look to pass on the cost of any improvements to the landlord.
Tenants should also consider whether so called “green deal” costs can be passed on by the landlord under the lease and seek to minimise this as far as possible.
Amar Iqbal is a commercial property solicitor with Wright Hassall, he specialises in working for landlords, tenants and developers.
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