With below average temperatures of late, Prop-Search has been considering the latest Government action on the energy performance of commercial property.
The Green Deal, which was introduced in the Energy Act 2011 and is a funding mechanism for energy efficiency improvements to property, came into force at the beginning of the year. It is designed to help the Government meet its carbon reduction targets without the need for consumers to pay up-front for energy efficiency measures. Instead, the works required to improve the energy efficiency of a property will be carried out by a Green Deal Provider and the occupier will pay for the measures under a Green Deal Plan, over time, as part of their energy bill.
The key to whether a measure, or package of measures, is actually financed through the Green Deal is the ‘Golden Rule’. The expected financial savings resulting from installing measures must be equal to or greater than the cost of repayment over the term of the Green Deal Plan. The repayment period may be the lifetime of the measure or a specified ‘pay-back’ period. If the estimated annual saving is expected to be equal to or greater than the expected annual repayment costs, the Green Deal Plan can be said to meet the Golden Rule and can go ahead.
Richard Baker, a Director Prop-Search, said: “It is hoped that the Green Deal will not have a negative effect on the value of a property, but this will largely depend upon the Green Deal Assessor – whose assessment report forms the basis of the Green Deal Plan – undertaking its role effectively and the use of the property remaining similar. For example, a reduction in the number of people occupying a property is likely to cut the amount of energy used and this may push the cost above what might be paid without a Green Deal Plan in place.”
Many landlords have been quick to identify a number of factors that would have an impact upon whether they would consent to tenants carrying out improvements under the scheme. In particular, whether payback periods would be within the period of a tenant’s lease; the landlord’s obligation for repayments should the premises become void during the payback period; and concerns that a Green Deal Plan would affect the freehold value and the market for lettings.
Richard Baker adds: “Because the person paying the energy bill is liable to pay the Green Deal charge attached to the property’s energy bill, a purchaser of a freehold or an incoming tenant who is going to pay the bill, need to be aware of the existence of any Green Deal Plan. The Green Deal regulations oblige a seller or landlord to disclose any Green Deal Plan attached to the property and it is anticipated that changes will be made to the standard preliminary enquiries and CPSEs.”
Because of the current state of the commercial market and the desire to ensure that costs on a letting are kept down as much as possible, little attention has been paid in recent years to energy efficiency measures. The Energy Act 2011 states that the Government must have regulations in force no later than 1 April 2018 that properties with an Energy Performance Certificate rating below a set level (not yet confirmed but believed to be ‘E’) cannot be let until landlords have made ‘such relevant energy efficiency improvements as are provided by the regulations’.
It is possible that a two-tier market will emerge prior to 2018, with energy efficient buildings having a ‘green premium’ and inefficient buildings having to apply a ‘brown discount’. Tenants will also want to look at any service charge provisions within a lease and to see if this enables the landlord to pass on any Green Deal charges for works to the common parts.
Richard Baker concludes: “It is possible that the Green Deal will have little effect on commercial property until the April 2018 deadline. In addition, as many commercial leases are now of five years or less, the Golden Rule is likely to apply only if the payback period is longer than the lease and landlords may not be willing to take on the higher electricity charge after the lease has ended.”