Two stark facts face the UK’s property sector:
- the Climate Change Act 2008 imposes a duty on the UK government to ensure that carbon emissions in 2050 are 80 per cent lower than they were in 1990; and
- around one half of the UK’s carbon emissions are caused by the construction and operation of buildings.
A key plank of the government’s response is Minimum Energy Efficiency Standards (MEES) which— within the next four years—will outlaw the letting of buildings with poor energy performance. But the government is also determined to secure gas supplies by facilitating the hydraulic extraction of shale gas or fracking.
MEES—the key role of investors
The government is committed to the prohibition of lettings of all properties—residential and commercial—which have a low energy performance rating. Its ideas were outlined in sections 43 and 49 of the
Energy Act 2011 and have been developed in a consultation paper published in July 2014. The regime looks set to take effect from 1 April 2018 with F and G ratings counting as low. This would leave around one in six properties affected by the ban. Earlier this year Estates Gazette estimated that the cost of lifting to the ratings of all such properties to E would be almost £30 billion.
Lenders are likely to impose conditions on agreements to provide finance to investors— EPC ratings of F or G may mean that no money will be forthcoming. Or loans over low-rated buildings may come with retentions to be released only when borrowers have carried out works which will boost energy efficiency. If lenders do not take measures like these, then they must face up to the prospect of their borrowers not being able to repay their loans—and enforcement action being futile. The Green Deal offers finance for energy efficiency works but, so far, only in the residential sector. Green Deal loans are repaid by means of a surcharge on energy bills. This means that, during voids, the landlord must make the repayments. The effect of such loans on values and the way in which they will be perceived by the market remains unknown.
Investors need to accept that their tenants will rarely have to fund improvements to the energy efficiency of their buildings:
- Short term residential tenants are statutorily shielded against such charges.
- Complex legislative provisions cover long term residential tenants’ service charge liabilities.
- Commercial leases are not regulated but tenants are wary about what their landlords include in service charge bills and the RICS Service Charge Code takes the line that service charges are there to allow the landlord to recover only the costs of the “operational maintenance” of buildings.
Investors should also bear in mind that plenty of new stock, built to contemporary energy standards, is on its way to the market as a result of the upturn. So, tenants in inefficient premises facing lease expiries or with the benefit of break rights may well look first for alternative sites. Leading investors understand this and are working closely with the UK government with a view to shaping the detailed regulations.
Perhaps, though, the best way for investors to boost their own sustainability is to negotiate re-gearings of longer term investments. Re-gearings during the downturn were aimed at extending occupiers’ lease commitments. “Green” re-gearings may well also boost those commitments with a view to funding the necessary energy improvements. But they will also have to deal with the complex practical ramifications of those works. Investors will need to recognize that, in most cases, they will have more to lose than occupiers—though a “green” re-gearing will allow both parties to keep their respective interests marketable.
Prospectors are now seeking licences to explore for shale gas reserves in the UK—the areas designated for preliminary exploration affect almost three quarters of the UK’s parliamentary constituencies. Once licensed they will use horizontal drilling techniques to reach the reserves lying several km from the well head.
In the UK land ownership extends to more than the surface of the land. Once, a Latin maxim explained that the title of a land owner reached “from the halls of Heaven to the fires of Hell”. This maxim has altered over the years to allow, for example, the passage of aircraft over land. A few years ago the Supreme Court ruled that the land owner owned the land below ground so far as was practicable but did not include the swirling magma deep underground. But this meant that a licensed petrol prospector carrying out horizontal drilling over 300m below ground was trespassing against the land owner. Although the land owner was awarded very modest damages, the ruling posed a significant obstacle to prospectors—and an invitation to objectors. The result is likely to be a voluntary scheme under which prospectors pay £20,000 for each horizontal incursion of more than 200m below ground. This will negate the prospector’s liability to investors and occupiers for sub- terranean trespass if it pays to the community on the surface £20,000 for each well that extends for more than 200m laterally. The payment will have to be made to an appropriate body which is likely to be some kind of local council.
MEES looks set to be one of the step changes required if the UK’s statutory emissions target is to be met. No doubt that is why leading investors have engaged with the UK government. Fracking, though, remains very contentious: 99 per cent of those responding to a UK government consultation on the reforms to sub- terranean trespass opposed the voluntary scheme described above; and the Scottish energy minister has implied that proceeding with such schemes may be recklesss.