When acquiring a new investment property with an asset life extending beyond 2015 enquiries should be made to establish whether the air-conditioning plant at the property:

  1. Contains HCFCs (hydrochlorofluorocarbons)
  2. Has been retrofilled with alternative gases
  3. Is a new system not containing HCFCs

In each circumstance due diligence will be required to establish what steps the seller has taken or planned in relation to the air-conditioning plant and to what extent the seller has involved its tenants in the decision making process.

Key points to consider include:

The length of unexpired terms

  • Tenants with long unexpired terms are likely to be more concerned with ongoing costs.
  • For tenants with short unexpired terms capital outlay is more relevant.
  • Where a tenant’s term ends before the end of 2014, they may resist paying any costs of replacing or refurbishing a working air-conditioning system as no action will be required to upgrade the system until they have vacated.

Capital or service charge cost

  • If the costs of retrofilling or replacement of air-conditioning were passed to tenants through service charges (rather than borne by the landlord as a capital cost), will this have a negative impact at rent review and therefore on anticipated rent increases?

Energy cost: how energy efficient is the system?

  • Are CRC contributions recoverable from tenants in the building or will additional charges of an inefficient system fall on the landlord?
  • Is the plant so inefficient to make the energy and CRC costs payable by a tenant so high that the lease is considered onerous on rent review?
  • Will future capital expenditure be required to replace the air-conditioning plant following implementation of the Energy Act 2011, which will make assets with low energy performance unlettable?

Maintenance cost

  • How long has the system been in place and have any leakage and cooling capacity issues been identified and rectified
  • To what extent are any warranties or collateral warranties available to the buyer
  • What is the plant life of the existing system?