Real Estate Tip of the Week: Energy Act – Part 2: Further consequences
Published 5 September 2016
From 1 April 2018, The Energy Act 2011 restricts a landlord's ability to let property where the energy efficiency rating of that property falls below the minimum threshold, currently an E rating (for more details see our previous tip). Unless a landlord can claim the benefit of an exemption, it must carry out energy efficiency improvement works to raise the rating of its building to an E or better before it can lawfully grant a lease. Even once the works have been carried out, the legislation has ongoing relevance. Landlords should consider:
- Rental income – post 1 April 2018, all new leases will (at least in the eyes of the Government) be “green”. However, for some years post 2018, the property industry will trade in both these new green leases and those that were already in place before the new regime came in to effect. The greener the lease, the higher the rent achievable. The higher the rent, the greater the capital value of the building. Until the majority of leases in our buildings are green, there will undoubtedly be a two tier rental and valuation market.
- Rent reviews - the Energy Act has far reaching, maybe unintended, consequences so far as rent review is concerned. Tenants may be able to use a building's poor energy credentials and the restrictions imposed by the Act to argue for a significantly reduced rental increase at review. This is a ticking time bomb, one that has potential to leave the landlord embarrassed, and, without changing the language adopted in leases, the tenant may hold the trump card.
- Paying for these works – landlords will undoubtedly try to pass on these costs to their tenants and some may be successful. However, without changes to the language commonly used in many leases, tenants will have a robust argument for refusing to contribute, either through service charge mechanisms or directly through their obligation to comply with statute.
- Alterations - the more significant and complex the tenants fit out, the greater the risk that those works may have an impact on the energy efficiency rating of a building. So tenants need to be armed with evidence that their works will not have a negative impact on the building’s rating. Without it, landlords may be justified in refusing consent for those alterations.
These are just a few of the issues that arise on an analysis of the Energy Act 2011. Be ready - talk to us about your buildings and together we can attempt to maintain the status quo and help deliver the results you’re expecting from your buildings.