Introduction
The Energy Performance of Buildings Directive was adopted by the European Parliament and the Council of the European Union on 16th December 2002 and came into effect on 4th January 2003.
The stated aims of The British Government's Energy White Paper in 2003 were to reduce emissions by 60% by 2050.
As a result of the European Directive, the Government introduced changes to Part F (ventilation) and Part L (conservation of fuel and power) of the Building Regulations, which came into force in April 2006.
Again, pursuant to the European Directive, The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 were laid before Parliament on 29th March this year. They run to some 25 pages but with a memorandum issued by the Department for Communities and Local Government laid before Parliament at the same time and running to some 115 pages by way of explanation of the regulations! The memorandum states that nearly 50% of the UK's carbon emissions arise from the way in which energy is consumed in its 25 million buildings. It goes on to state that it is therefore a key policy objective to reduce energy consumption attributable to buildings and the implementation of the European Directive is a key part of meeting this objective. In terms of the timeline for implementation of the Regulations:-
- 1" January 2008 - Energy Performance Certificates will be required for the construction sale or letting of commercial buildings larger than 1,000 sq meters (10,764 sq ft).
- 6th April 2008 - Energy Performance Certificates will be required for the sale or rental of all commercial property larger than 500 sq meters (5,382 sq ft) and for the construction of all other categories of commercial property.
- 1St October 2008 - Energy Performance Certificates will be required for all commercial property of less than 1,000 sq meters (10,764 sq ft).
- 4th January 2009 - The deadline for possession of a valid report following the first inspection of all existing air-conditioning systems with an output of more than 250 KW expires.
- 4th January 2011 The deadline for possession of a valid report following the first inspection of remaining air-conditioning systems with an output of more than 12 KW expires.
Energy Performance Certificates will divide buildings into bands A to G with bands B to C representing the current Part L standards in the Building Regulations.
Bearing in mind the target for reduction in overall emissions by 60% by 2050, it is likely that the Government will consider the property industry in general and the commercial property market in particular as a soft target for extra regulation and control and for bearing the lion's share of the cost of reducing carbon emissions. The fact that this is likely to be borne ultimately by occupational tenants has not deterred this Government in the past from introducing expensive measures and additional regulatory burdens on industry and commerce.
Impact of the new legislation
- Agreements for Lease and development agreements
Landlords' and Developer's obligations will continue to contain standard requirements that the construction of the building is carried out in accordance with the requirements of all competent authorities, all relevant statutory provisions and the Building Regulations. The Agreement will annex an agreed set of drawings and specifications, draft professional team appointments and warranties and it is these documents which will provide the detail of how compliance with Parts F and L of the Building Regulations and The Energy Performance of Buildings Regulations will be achieved.
It may be that the introduction of Energy Performance Certificates will lead to a two tier market in much the same way as it was anticipated it would when VAT was introduced on commercial rents. Landlords insisted on an assumption on rent review that the tenant could recover VAT in full to avoid a discount if the property was located in an area predominantly occupied by the financial services industry where irrecoverability of VAT in full is a frequent problem. But tenants' lawyers soon got wise to this and countered that this created an artificial set of circumstances on review and resisted the Landlords' attempts to include artificial assumptions and disregards. It is likely the same will happen with Energy Performance Certificates if the Landlord includes an assumption that the building has a certificate or as to the class of the certificate held.
Tenants' lawyers will continue to insist that the usual disregard for tenant's improvements is retained within the rent review disregards.
The usual arguments between Landlords and Tenants on determination of Leases
will no doubt continue to arise.. What additional works will the Tenant have to undertake to yield up the demised premises in full repair and accordance with Parts F and L of the Building Regulations and The Energy Performance of Buildings Regulations? The Tenant will have the same defence under Section 18 of the Landlord and Tenant Act 1927. The damages the Landlord is able to recover will be limited to the diminution in value of the Landlord's reversionary interest as a result of the breach of covenant. It is unlikely there fore that there will be any changes here.
- Tenants’ obligations to comply with statute
The new legislation will simply add to the existing statutory framework which governs the use and occupation of commercial buildings e.g. health and safety, the Asbestos Regulations and the Fire Safety Order 2005. There was considerable concern amongst Tenants with the introduction of the Disability Discrimination Acts about the additional costs of compliance and adverse impact on operational performance in respect of commercial premises particularly in the retail sector. But despite such concerns the legislation has not had a large impact on costs of occupation and the requirement for occupational tenants to make "reasonable adjustments" to their premises to cater for the disabled has been leniently interpreted by the Courts so far. It remains to be seen what effect on everyday costs and operational efficiency the new legislation will have on occupiers. It is likely however that those concerned about brand equity or corporate social responsibility will be prepared to pay a premium rent for a building with a superior energy performance rating.
It is standard in a Licence for Alterations for Landlords to require tenants to comply with statute in carrying out alterations and additions. It will be a question of construing individual Leases to see whether Landlords' requirements relating to quality and fitness for purpose of the materials to be used in carrying out the alterations and additions so as to enhance the energy performance of the building once altered can lawfully be imposed. Clearly, if the alterations and additions fall within the scope of the Building Regulations then Parts F (ventilation) and L (conservation of fuel and power) will probably apply and the Landlords' requirements enshrined in the Licence for Alterations will almost certainly be lawful. Other requirements may fall outside the ambit of the Tenant's covenants and the Building Regulations and amount to an unlawful withholding of consent.
- Warranties and Appointments and CPSE Enquiries
Solicitors will want to see copies of Energy Performance Certificates when raising preliminary enquiries on all lettings and purchases of commercial premises starting with the larger ones from January 2008 and for all commercial buildings from October 2008. All designers of commercial buildings including design and build contractors will have to consider the operational performance and energy performance rating of buildings at the initial design stage and of course at the Building Regulation application stage. Developers will require this to fall within the services provided by architects consulting engineers and M&E consultants and incorporated within such professionals' Appointments or (as appropriate) within the Employer's Requirements, if the method of procurement is to be by way of design and build contract and purchasers and tenants will almost certainly insist on Collateral Warranties from the professionals and contractor and possibly also from the inspectors who issue the Energy Performance Certificates. Assuming they are appointed either by local or central government it seems unlikely that inspectors themselves will be prepared to give Collateral Warranties and the cover would in any event be of dubious value without proper arrangements for professional indemnity insurance.
The jury is out as to this Governments' green credentials or whether it is simply paying lip service and jumping on the green bandwagon - it is perhaps instructive that Article 8 of the European Directive permitted Member States either to regulate to require one-off and regular inspections of boilers and heating systems or to take steps to ensure the provision of advice and information. The UK has chosen the second of these routes. The question is whether Energy Performance Certificates will give rise to a two tier market of secondary properties, probably older ones with poor energy performance ratings which will command lower rents and capital values and newer better, performing buildings sought after by companies such as multiple national retailers seeking to protect their brand image and equity and companies seeking to focus on their green credentials and social corporate responsibility, which will command higher rents and capital values.
Whether or not the new legislation has a major impact on the day to day operation of commercial buildings by occupational tenants will depend on whether the Government is willing to extend the operational ratings certificate system which will apply to buildings occupied by public authorities and government departments from October 2008 to all commercial buildings and whether the legislation is extended so that measurable targets are set for emissions from all commercial buildings with the resources made available to enforce such measures. Only time will tell whether the new legislation will have the necessary teeth to make a 60% reduction of C02 emissions by 2050 realisable or whether it is just another damp squib like the Disability Discrimination Act provisions.
Who can help?
If you would like further advice about any issue concerning residential or commercial development please get in touch with your usual contact at plainlaw or Philip Horn on 01865 240202 or e-mail him at philip.horn@plainlaw.co.uk
This edition of “The Law made plain” is written to provide you with general information. It is recommended that you seek specific professional advice before taking any action.
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