Hidden Improvement Costs- change is coming in 2018

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It may seem a long way off, but from April 2018 landlords "may not let" commercial properties with an EPC rating of F or G unless improvement is not practicable or an exemption applies (for example, if the tenancy is for a term of 6 months or less).  Similar regulations will apply to residential properties.

The regulations will apply to the grant of new leases, lease extensions and renewals from April 2018 and will then apply to all existing and new leases from April 2023.

So why is this important?

Well, property owners may need to make improvements to the property before marketing them.  If the property is unmarketable as a result of a poor energy efficiency level then this will have a significant impact on its value. This will also be a concern for lenders.    

It is estimated that nearly 20% of all tenanted commercial properties have a poor energy efficiency rating.  Further, some buildings currently rated E could be downgraded to F in the future. 

Penalties, based on the rateable value of the property, will apply for non-compliance and could be as much as £150,000 per property. 

So who should pay for the improvements?

This is a very important question as the cost of improvements could be significant.  If there is no existing lease then the landlord may have to pay for the works before letting the property.  If there is an existing lease then the tenant may have responsibility for complying with statute.  Sometimes, the landlord retains responsibility for the structural parts of the building and may or may not be able to recharge the cost of improvements to the tenant under the service charge provisions.    

So what steps should be taken now?

Landlords should review their existing property portfolio to ascertain whether there are any buildings with a poor energy efficiency level, or with a potential for a low rating to be downgraded to F or G.  If any such buildings are identified then landlords will need to consider who is responsible for the improvement works and what the likely costs will be. 

Tenants should also be wary of any improvement costs that may be the tenant's responsibility under the terms of an existing lease. If a tenant is looking to take a new lease of a poorly rated building then it should consider requiring the landlord to carry out the necessary improvements.