Since 1st August 2007 there has been a phased introduction of the requirement for a Seller/Landlord to produce an Energy Performance Certificate ("EPC"). Now EPCs and recommendations as to how the energy performance of a building can be improved, are to be produced (save in limited circumstances) whenever a building is constructed, sold or rented. This also applies to separate units in a building (although in limited cases an EPC of the building as a whole is acceptable rather than the individual units).
The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 (the "Regulations") which introduced the requirement, confirm that the EPC and recommendation report have to be provided to a prospective purchaser or tenant free of charge and at the earliest possible opportunity. They also provide that while an EPC will generally be valid for a period of 10 years, it will be automatically revoked if a new EPC is obtained.
As a result there are some issues that you may want to consider particularly if you are proposing to let a building or unit in a building:
- Validity - An EPC will be automatically revoked if a new EPC is commissioned. Where a new EPC is obtained in respect of part of a building (e.g. a unit) the previous EPC will be revoked in relation to that part. This may be of concern to a Landlord. A Landlord will, as a result of the Regulations be required to produce a valid EPC to a prospective Tenant and will therefore hold a valid EPC for this purpose. If an existing Tenant then commissions its own EPC perhaps because it is planning to assign its interest in the property, the Landlord's EPC will no longer be valid in respect of that property. As such it is advisable to ensure that your negotiations confirm that the Tenant is to provide the Landlord with complete copies of any EPC commissioned.
- Surrender - A Landlord should give careful thought to a Tenant's request to surrender a property. If the Tenant is selling their business it would be normal for the Tenant to approach the Landlord for consent to assignment. However, if the Tenant assigns its interest the Tenant will be required to provide an EPC. Sometimes, perhaps for sensible reasons such as the Term is due to expire in the near future, a Tenant will propose surrendering their interest with a new lease being granted to the business purchaser. If this happens the Tenant will not be required to produce an EPC and alternatively, the obligation will fall on the Landlord when granting the new lease. In these circumstances therefore, consideration should be given to whether to include in the surrender an obligation for the Tenant to provide an EPC to the Landlord. This of course will not be required if the Landlord already holds a valid EPC for the property.
- Rent Review - a typical rent review clause in a lease refers to the "hypothetical lease" which confirms what the terms of the hypothetical lease are. It remains to be seen at this stage whether a property with a higher asset rating will command a higher rent. If this proves to be the case it may be worth including in the rent review provisions an assumption that the property has a specific asset rating. Alternatively, where an EPC shows a low asset rating for a property, it may be worth disregarding any effect on the rent that the actual asset rating may have.
- Service Charge - When there is a rental of a property the Regulations require that a valid EPC is provided to the prospective tenant free of charge. There may however, be other circumstances in which the Landlord obtains an EPC for a building. Indeed it could be advantageous for a Landlord to obtain an EPC for a building which can then be used by the Tenant(s) to pass on to its proposed assignees or subtenants. In this case the Landlord may want to recover the cost of obtaining the EPC as part of the service charge (although care must be taken to ensure that an assignee of the Tenant does not ultimately pay for this). Alternatively, where the property is not multi-let, the lease might specifically confirm that the cost is to be split or a copy of an EPC obtained by a Landlord can be provided to the Tenant at a charge.
- Alienation - in a similar way to the comments under Surrender above, a Tenant would be required to produce a valid EPC on an assignment of their interest. The Landlord should ensure that a copy of any such EPC is provided to the Landlord.
- Alterations - when considering the ability of a Tenant to make alterations to a property, the Landlord should give consideration firstly, as to whether such alterations would adversely affect the asset rating of the building and secondly if such alterations would trigger the need for a new EPC. A new EPC would be required if the alteration would result in creating fewer/more units (sub-letting of a "permitted part") and the services (such as heating, hot water and air-conditioning) were modified as a result. Tenants do have statutory rights in respect of alterations and therefore it is uncertain how effective a clause may be which tries to restrict alterations. However, a clause could be inserted confirming that no alterations are to be undertaken which would adversely affect the asset rating of the building or triggers the need for a new EPC.
These are just some points to consider when granting a lease in this new world of "greater energy efficiency". Although they are points that could be picked up when drafting the documentation, it is advisable for as many points as possible to be negotiated in advance in order for the transaction to proceed as smoothly as possible. If you have any queries please do not hesitate to contact any member of the property team.
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