One of the main ways in which the EU and the UK Government propose to tackle climate change and reduce emissions is through greater energy efficiency, including efficiency in buildings. Commercial property is now subject to a range of legislation aimed at reducing carbon emissions. These requirements may raise issues for those lending against property, as well as property owners and occupiers.
- Could certain properties become less attractive to target tenants?
- Will properties require costly energy efficiency capital improvements?
- What impact does this have on value and whether a property provides adequate security?
Lenders need to understand two schemes in particular: Energy Performance Certificates and the CRC Energy Efficiency Scheme.
Energy Performance Certificates (EPCs)
An EPC provides information on how energy efficient a building is, giving it a rating from A (very efficient) to G (inefficient). When a building is to be sold or rented out, the seller or landlord must provide any prospective buyer or tenant with a valid EPC and a recommendation report, free of charge, at the earliest opportunity. Certain buildings and transactions are exempt from the requirement to have an EPC (for example some listed buildings and religious buildings).
Under the Energy Act 2011, the Secretary of State has powers to require landlords to achieve a certain energy efficiency rating for a property before it can be let or a lease renewed. These new regulations must come into force by April 2018 at the latest and will make it unlawful to let residential or commercial properties with an EPC rating of F or G (the lowest two grades of energy efficiency).
Key issues for lenders
- If a property cannot meet the minimum efficiency level, it will effectively be "unlettable" unless the landlord can upgrade it. It is estimated that approximately 20 per cent of non-domestic properties could be in the F or G rating brackets.
- The proposed new regulations are likely to negatively affect the value of inefficient properties.
CRC Energy Efficiency Scheme
The CRC Energy Efficiency Scheme is a mandatory emissions reduction scheme. It requires companies to monitor and report on energy consumption across all operations within their corporate group. It applies to large energy users (in both the public and private sectors), for example retailers, shopping centres, supermarkets, hospitals, hotel chains, and other large office occupiers such as banks, accountants, law firms and data centres.
If an organisation uses more than 6,000 megawatt hours per year of energy (electricity or gas for heating purposes), it must register as a participant. Participants must then:
- prepare and submit an annual report, including details of all electricity and gas supplies consumed; and
- buy CRC allowances equivalent to annual emissions (one allowance per tonne of CO2). The cost per allowance is set by HMRC and is currently £16 for the 2014/15 compliance year.
Key issues for lenders
- CRC annual compliance costs can be significant (for example, £500,000 per year for a large multi-site retailer).
- Usually, liability for CRC rests with the end user responsible for paying for the electricity/gas. There are some exceptions – and particular complexities when dealing with franchise operations, joint ventures and private equity structures.
- The position for landlords and tenants is complex. Large commercial property companies have found that as landlord they are liable for CRC for some properties and not others. Leases typically do not anticipate CRC, and so landlords are in some cases finding it difficult to recover the costs from tenants.
Alongside these mandatory schemes, there are various voluntary schemes, which may also be relevant to property-based lending.
The Green Deal is a Government scheme, launched in January 2013, through which electricity bill payers can obtain funding to carry out energy efficiency improvements to their premises.
There are two options to fund improvements: Green Deal finance and (available very shortly) the Green Deal Home Improvement Fund (GDHIF). Although the publicity for the scheme has focused on residential premises, Green Deal finance is also available for non-domestic properties. Uptake of Green Deal finance has been slow, so the impact of this scheme on the property market remains to be seen.
The Government is committed under EU law to sourcing 15 per cent of the UK's energy consumption from renewable sources by 2020 and has identified solar photovoltaic generation (solar PV) as a key part of the future energy mix. The Government has recently announced a shift in policy away from large solar farms and towards rooftop solar. As part of this policy, the Renewables Obligation, one of the principal funding streams for solar projects, is being closed to solar PV projects with a capacity of more than 5MW after 31 March 2015, meaning that these projects will be forced to navigate the new support mechanism of Contracts for Difference two years earlier than other technologies. However, the Feed-In Tariffs (FITs) scheme remains in place and is targeted at small-scale generators, which would include most rooftop solar generation.