While the government deliberates on the feasibility of scaling back some of its “Net Zero” ambitions, one area that still stands is the energy performance targets for commercial buildings in England and Wales. As you may already know, the Energy Performance Certificate (EPC) for commercial premises must be classified as at least “C” by 2027 and at least “B” by 2030 – with some exceptions, but the focus of this article is not to explore those.
Considering the age and design of many buildings in England and Wales, significant building works are to be expected in the country’s real estate sector to comply with the future energy performance objectives set by the law. Buildings with energy performance ratings of A or B are relatively rare, especially in older shopping centres and commercial streets in cities like London.
The questions we are going to explore are the following:
- How would this affect you, as a potential tenant of commercial premises?
(Existing tenants will already be subject to the clauses in their existing leases when it comes to the sharing of the costs of necessary building work to bring the premises in line with the new requirements.)
- What should you and your real estate agent consider when negotiating the most important points of the Heads of Terms in a new commercial lease?
What do the changes to EPC categories mean for a potential tenant?
- First and foremost, it is crucial for a prospective commercial tenant to inquire about the Energy Performance classification of the premises at the viewing stage. The landlord agents should legally have an EPC certificate for you to view, and the lease terms should specify the energy performance level (as confirmed by the EPC). EPCs should be registered in a central government database to allow you to search for an existing EPC for a specific location.
- Next, if the EPC and/or provided information reveal that the premises do not meet the legal requirements for 2027 or 2030 (energy performance levels C and B, respectively), it is important to examine the “recommendations report” usually attached to the EPC. This report lists suggested building work to improve the energy performance of the rental premises.
- After that, it is advisable to assess with your design contractor and/or the architects the potential building work required to meet the 2027 and 2030 objectives, and consider their feasibility. Considerations should include the lighting and the air conditioning system which may need replacing, and the quality of the store’s storefront.
- Once you have considered the necessary work, you will have to think about the authorizations that will be required: will planning permission be required or should a written approval from the landlord (obtained according to the required formalities) be enough? What would then be the timeframe to get the planning permission, and would this impact on your move-in date?
- Finally, an important question arises: who will pay for the work? Will it be the tenant or the landlord? Will the costs be shared? Will a rent-free period or another incentive be negotiated? The answers to these questions will depend largely on the negotiations you have with your future landlord regarding the terms and conditions of the lease and, possibly, the popularity of the specific location in the real estate market. In practice these points are often the most challenging, as prospective tenants don’t pay enough attention to the energy performance of the premises and might overlook or underestimate the impact it would have on their budget.
Considerations on the Heads of Terms for a Lease Agreement
Some landlords have a policy not to carry out any building work and let the tenant carry the responsibility. Tenants for their part often feel, and rightly so, that the landlord ought to contribute to the tenant’s expenses if they significantly improve the leased premises. At an early stage, ask your future landlord his position on the question. Avoid in the Heads of Terms statements like “the parties’ lawyers will resolve the issue.” It is unlikely that the lawyers will come to an agreement on this if their respective clients’ positions disagree with each other. After reviewing the EPC and considering the five points mentioned above, it will be your responsibility to negotiate the terms related to energy performance as well as having the responsibility for, and financial burden of, the work.
- Some owners may, for example, agree to undertake the work required, or to a financial contribution, or to an additional rent-free period to help cover the cost. This is the solution most tenants would prefer, however careful consideration has to be given, when the landlord carries out the work or covers the cost, to the consequences for any future rent review and how the cost of the work might be incorporated in the rent (if at all). Your agent should advise you on the possible consequences to the revised rent and what increase might be considered as “fair”.
- When leasing premises in a shopping centre (or as part of a larger real estate complex), it is important to remember that, as part of the leasehold costs, you will likely be required to contribute to the costs of improving the energy efficiency of the entire shopping centre. Make sure this is considered in the Heads of Terms.
In conclusion, there is no perfect solution. However, while searching for your commercial property, keep in mind the points mentioned above and address the relevant issues in the Heads of Terms. Compliance with the energy performance requirements as set by the English legislator will, hopefully, therefore not be too challenging.
Original article written by our real estate law expert, Alexander Harris, and translated and adapted by our French group.
Feel free to contact us for any legal advice in this area.
Article based on information available as of December 21, 2023.
French Group, Browne Jacobson