Landlord’s EPC Deadline Could Give Tenants Whip Hand in Lease Negotiations

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November 18, 2016

Commercial property landlords across Wales are being warned to ensure their properties have a minimum Energy Performance Certificate (EPC) of E or above by the time new legislation comes into force.

Minimum Energy Efficiency Standard (MEES) for commercial property will come into effect from 1 April 2018 and means it will not be possible to grant a new lease to a new tenant or renew a lease with an existing tenant unless the EPC reaches the minimum level.

There are some exemptions notably those on short leases (six months or less) or long leases (99 years plus) but the standard will also apply for existing leases from 2023.

With a significant proportion of the building stock across Wales affected by these regulations, Stephen James from Bruton Knowles is now advising that landlords start reviewing their asset schedules to identify the properties with an EPC rating of F and G.

He also says those that are border line E should also be looked at, as they will be viewed as being more risky than better rated buildings.

Stephen said:

“The regulations will make it much more difficult to market certain properties unless improvements are made.

“From a valuation perspective, a large number of properties are likely to be affected which will have implications for the banks and secured lending. Rent reviews on poorly rated properties will also be affected.”

According to Stephen once poorly rated properties have been identified, a re-run of the EPC should be undertaken as the existing EPC may not take into account any improvements made to the property or default values.

He also says it could be possible that inappropriate assumptions were made in the original assessment. Re-running the EPC process could then potentially bring the property up to an E rating, without having to invest significant capital expenditure.

Stephen added:

“Early identification of measures which will achieve the minimum E rating, the determination of the nature of works and a programme of works is vital as this will allow capital expenditure to be managed accordingly.

“Appropriate periods for undertaking any work needs to be considered, such as during planned refurbishment and maintenance. Lease clauses should be reviewed around landlord’s access for undertaking works if the tenant is still in situ.

“However, until MEES are fully in place and the impact they will have has been assessed, it is difficult to accurately gauge how they will affect value. Regardless, this will be attached to the cost of necessary improvement costs.

“It is worth pointing out the quality of EPCs can also vary substantially, so it will be difficult to accurately assess the level of capital expenditure required to bring a building up to a standard.

“Generally there is considered to be a lack of awareness and engagement by landlords and tenants of the EPC legislation and the impact it is likely to have on their assets.

“The banks may also not be fully aware of the potential impact on their LTV ratio’s and associated risk attached.

“There is still time to make improvements to obtain the minimum rating but if landlords do not review the EPC ratings and start to make improvements, they will not be able to lease their property – unless they have applied for an exemption- which will affect their rental income and value of their property.”

Article taken from Business News Wales on 18/11/16