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Energy performance certificates - what you need to know

Posted
June 11, 2008
Commercial Property
WHY ARE EPC'S BEING INTRODUCED?

One of the ways in which the Government and the European Union are aiming to reduce the effects of climate change and to lower greenhouse gas emissions is through greater energy efficiency. The Government has signed up to the Kyoto Protocol and is committed to reducing energy consumption. Buildings are a major source of greenhouse gas emissions both in their construction and energy usage during their lifespan. According to the Government, making more efficient use of energy in buildings is one of the most cost-effective means of reducing greenhouse gas emissions as well as energy costs for owners and occupiers. The Directive on the energy performance of buildings was agreed on by all members of the European Union in January 2003 and has been implemented in England and Wales by the Energy Performance of Buildings (Certificates and Inspectors) (England and Wales) Regulations 2007 ("the Regulations"). WHEN ARE EPC'S BEING INTRODUCED? An EPC will be required for all commercial premises from 1st October 2008. The Government has announced a phased timetable for the introduction of EPC's for different types of commercial premises. The first phase, relating to the construction, sale or letting of commercial premises with a floor area of over 10,000m2, was implemented on 6th April 2008. From 1st July 2008, EPC's will be required on the construction, sale or letting of commercial property with a floor area of 2,500m2. The final phase will be implemented on 1st October 2008 and relates to the construction, sale or letting of all remaining commercial premises.

WHAT DOES AN EPC ENTAIL?
Every time that a commercial property, whether new or existing, is sold or let, an EPC of no more than 10 years old will have to be produced to prospective purchasers or tenants. The principal characteristic of an EPC is the asset rating, which indicates the energy performance and carbon gas emissions of the building. The asset rating will be expressed on a scale of A-G which is similar to the rating system that is already in place for domestic appliances. The EPC must also incorporate a recommendation report specifying how the energy efficiency of the building can be improved. The EPC can only be produced by a qualified energy assessor and must be provided by Sellers and Landlords free of charge to any prospective purchasers or tenants.
HOW MUCH WILL AN EPC COST?
This has been the cause of great debate. The Government has intimated in its Regulatory Impact Assessment that the cost of producing an EPC for complex multi-let commercial premises will come in at approximately £1,790.00. However, the Government appears to have underestimated the true cost given the scarcity of qualified energy assessors, which will no doubt have a significant impact on the cost of an EPC. Recent press reports suggest that EPC's for the larger or more complex buildings could cost in the region of £10,000.00. Only time will tell what the true cost will be. What is likely is that the cost of producing an EPC will be driven by market forces and will depend on the size and complexity of the building.
WHO WILL PAY?
The Regulations are silent on this issue. It is somewhat inevitable that negotiations will take place between landlords, tenants and their advisors as to who is to bear the cost but the most likely outcome is that it will be the responsibility of the landlord. The question remains, however, as to whether the landlord will be able to recover the cost of this through the service charge? For leases granted post-6th April 2008, it will be for the parties to negotiate whether the landlord can recover the cost of the EPC through the service charge provisions and careful drafting will be required in this respect. Landlords may argue that tenants will derive benefit from the production of an EPC as they will be able to make use of it on any subsequent assignment or underletting. This argument may not necessarily win through in all cases. For example, tenants under short term, contracted out leases are likely to argue against recovery through the service charge on the grounds that the EPC is of no benefit to them. There will be no reference to EPC's in leases pre-dating 6th April 2008 and it will be a point of debate as to whether the cost can be recovered through the "sweeping up" service charge provision (if any) contained in the lease.
WHAT ARE THE SANCTIONS FOR NON-COMPLIANCE?
It is for the seller/landlord to provide an EPC on any sale or letting. The responsibility for enforcing the seller's/landlord's obligation to produce an EPC will fall on the shoulders of Trading Standards. Under the Regulations, the maximum sanction is a civil penalty equal to 12.5% of the rateable value of the premises (minimum £500.00, maximum £5,000.00). Failure to commission an EPC following enforcement by Trading Standards may well result in an additional penalty of up to £5,000.00.
WHAT WILL BE THE EFFECT OF EPC'S ON THE MARKET PLACE?
There has been much debate as to whether the energy rating of a commercial property will impact upon the market. Certainly, a potential buyer/tenant will be in a better bargaining position during sale/lease negotiations if a building is found to have a poor energy rating. This may well result in a diminution of the sale price/rent. However, it seems unlikely that energy efficiency will be the sole determining factor for a prospective purchaser/tenant in choosing suitable premises. The likelihood is that the state of the market, the condition of the building and its location will continue to dominate a purchaser's/tenant's thinking. This article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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