More than 500m sq ft of commercial floorspace is in need of EPC renewal in the next 12 months, meaning landlords will be keenly awaiting news of the government’s review of the rules.
The Department for Energy Security and Net Zero announced last week it plans to review regulations and timelines around EPC standards which require all commercial buildings to be a minimum EPC B by 2030 or face obsolescence.
EG Radius data shows there is 584,417,259 sq ft of commercial space with an EPC due to expire in the next year. Of that, 92.5% meets the current minimum standard of EPC E, but just 23.5% is ready for a 2030 deadline.
This disparity between current levels and the 2030 target meant some sort of pushback had been widely expected within the industry, which is hoping the review will lead to greater clarity and a more realistic deadline.
Certainty needed
Flora Harley, head of ESG research at Knight Frank, said: “We just need certainty. It’s the one thing investors and asset owners really want and need to make these sometimes-big investments. If we get that clarity, there will be more impetus to act and we can move faster.”
Harley believes a delay in the timelines could actually increase the speed with which the industry moves on the issue. “The refurbishment rate needs to double, essentially, from what it has been to meet that 2030 target in terms of the amount of floorspace needed to get there,” she said. “Intervention, therefore, needs to happen a lot quicker, but there are obvious constraints – including, but not limited to, the cost and, when vacant possession is required, timing around lease events.
“The uncertainty on timelines has potentially caused some hesitancy among property owners on when to undertake capex.”
However, there are calls for the government to look far more broadly at issues such as national grid infrastructure, the legal framework and also the effectiveness of EPCs themselves as a tool to drive the built environment towards net zero.
Landlords looking to carry out improvement work will have to do so within the rules of the Landlord and Tenant Act 1954, which is designed to provide security to tenants by offering renewals based broadly on the terms of the previous lease which, especially on longer leases, would have been unlikely to feature environmental provisions. This means tenants can effectively opt out of landlords carrying out work that would improve the performance of the building.
Anna Ralston-Crane, partner in the real estate disputes team at CMS Cameron McKenna Nabarro Olswang, said: “If I had a magic wand, I would amend the 1954 Act immediately to include a presumption in favour of sustainability. Despite the consensus about the net zero challenge, this often breaks down when it comes to agreeing what green clauses should go in the renewal lease.
“Tenants are emboldened to refuse what are now market-standard provisions on the basis ‘it’s not in the old lease – are you really going to go all the way to court on this, where you probably won’t win?’. The 1954 Act is an out-of-date barrier that needs to be very quickly brought into the 21st century.”
There are also concerns over the accuracy and consistency of EPC rulings, as they are based on modelled predictions rather than emissions data.
“EPCs are no longer fit for purpose as a measure of energy efficiency and I think the whole system needs an overhaul,” said Michael Cox, senior associate in the CMS real estate disputes team. “They are based on theoretical models. We need real-world in-use performance data to more accurately understand current energy use.”
He added: “EPC assessors take varying approaches based on surface-level inspections and assumptions. This generates inconsistencies. Reform is required to update the EPC process as part of the drive to meet net zero.”
Questions of enforcement
Another area of complication for landlords is a change made in 2022 to the way EPCs are calculated, designed to reflect the increasing contribution of renewable energy to the national grid. This effectively downgraded gas as an energy source and upgraded electricity, meaning some buildings may see changes to their EPCs even if no work has been carried out.
Harley said: “We looked at a sample of 620 properties that had an EPC before and after June 2022. We then were able to understand whether the main source of heating had remained the same, noting that other improvements or alterations may have been made to those buildings which have not been taken into account.
“Of the sample, some 345 had electricity as their main heating source in both the first and second EPC and, of those, 97% saw a rating improvement in terms of the numerical score, not necessarily the letter banding, so it appears to be having an impact.”
Another important issue is that of enforcement. Compliance with EPC regulations is being policed by local authorities through a system of fines of up to £150,000. The DESNZ has said money from the fines will be retained by local authorities and could potentially be a useful source of funding for cash-strapped councils. However, it remains to be seen if they will have the resources to enforce rules effectively. The industry will be looking for timely answers to some very complex issues.
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