Danny Lafferty highlights the problems arising from the complexity for landlords of new carbon and energy performance regulations to be introduced this year.

On 1 September 2016 new carbon and energy performance regulations for commercial property will come into effect which require landlords to provide new owners and tenants with an Action Plan for Carbon and Energy Performance (ACEP). However, few people in the industry understand what is required.

Part of the problem is the complexity of Section 63 of the new law passed earlier this year. In England, the process is straightforward, if a commercial property falls into the F or G rating bands and is not upgraded then it cannot be let or sold after the date new legislation is introduced in 2018.

In Scotland all owners with properties 1,000sq m and above must comply with the new regulations to bring buildings up to improved standards. The main difference with the new system is that the action plan for a property stipulates that landlords must carry out the required work within three and a half years. However there is a loophole that allows landlords to defer the action plan within the first 12 months so instead of an Energy Performance Certificate (EPC) on display, the owners of the building would display a temporary certificate which would need to be renewed annually. As the deferment process is open-ended building owners could conceivably do this every year.

There is flexibility within the new system to substitute alternative actions in the energy plan to reduce the building’s carbon footprint. For instance a landlord could say: we won’t change the lighting but we’ll put in a new boiler. So the whole process is open to negotiation as well as to potential abuse by unscrupulous landlords. The landlord could increase the service charge to cover some of the action plan work such as new boilers. Alternatively, the landlord could look to recover the cost of improvement work through the dilapidations process at the end of the lease so it’s likely that negotiations around a tenant’s exit from a building could become more complicated and/or protracted. If tenants don’t protect themselves via the lease they could find themselves funding upgrading works which will ultimately only be of real benefit to the landlord. It’s also worth highlighting that landlords are likely to view any improvements to a building’s performance as an opportunity to increase rental levels.

This means that undertaking valuation of a property or a pre-acquisition survey will be affected by the new legislation. If a landlord is hoping to sell his property whilst there is an ‘unactioned’ plan for improvement in place, then this may have a detrimental effect on value and further complicate any due diligence exercise being undertaken by the potential purchaser.