Clarion's property department is delighted to announce the launch of a new quarterly commercial property newsletter.
Each edition will focus on three key topical issues which affect our sector. The articles will be written by members of our team and we trust that you will find these readable, topical and informative. Hopefully, they may spark questions and comment and it would be great to hear from you if you wish to get in touch. We will also use this newsletter to inform you of upcoming events which may be of interest to you.
The property team at Clarion comprises three partners and eight fee earners. We have an unrivalled breadth of experience and expertise in the property sector, acting for large corporate organisations through to private individuals. We advise on all kinds of investment and development transactions and for a wide range of landlords and tenants. We also represent banks and other funders.
The energy efficiency regulations are due to come into force in England and Wales in April 2018. After this date, all properties with an energy rating of less than “E” will no longer be able to be let. Last autumn, Clarion presented a seminar on the potential impact of these regulations and the government has now provided updated guidance as to how these regulations will work. Ben Lamb looks at the key features of the regulations and their affect on landlords and tenants.
Now that the government has fired the starting pistol for our departure from the European Union, Martin Grange looks at the potential effects on the property market.
Gina Rhodes considers a recent court case which gives useful guidance to landlords if they wish to re-develop a property which contains a sitting tenant.
It is estimated that around 25% of all commercial properties in England and Wales have an energy efficiency rating of “F” or “G”. Subject to certain exemptions, under the new energy efficiency regulations the following will apply:
- from 1 April 2018 no new leases or property with this energy efficiency rating can be granted; and
- from 1 April 2023 no leases of property with this energy efficiency rating can continue.
In February, the government published a guidance note to accompany the new regulations which provides some helpful detail. Landlords and tenants should familiarise themselves with the key details and the impact that the new regulations may have.
The regulations apply to all non-domestic property which is required to have an energy performance certificate. This is the vast majority of commercial properties.
If an energy performance certificate for a property rates that property as an “F” or “G” rating then a landlord must avail itself of one of the exceptions if it is to be able to grant a lease of the property after April 2018 or allow an existing lease to continue after April 2023. The key exemptions are set out below.
- The landlord has carried out all relevant energy efficiency improvements that can be made but the property still has an “F” or” G” rating. This exception will last for five years after which time the landlord must again try to improve the efficiency of the property or apply for another exemption.
- The landlord cannot get a necessary third party consent to allow it to carry out the energy efficiency works. The main consent that is likely to be required would be a sitting tenant’s consent. If an existing tenant will not consent to the landlord carrying out the works then the landlord can claim this as an exception. However, it will need to carry out the energy improvement works once the tenancy ends.
- If any energy efficiency improvements works would decrease the market value of the property. The exemption will last for five years after which the landlord must re-assess whether works can be carried out without adversely affecting the property’s market value.
If a landlord can rely on one of these exemptions then it will be able to let the property even if it is rated “F” or “G”.
All exemptions operate on a self-certificate basis and claims for exemptions must be logged on a central register that can be accessed via the gov.uk website. There is no fee payable for logging an exemption in respect of the property. The register will be open from April 2017.
It is important to note that if you are purchasing a property then the previous owner’s exemption does not apply to you. As a new landlord you must apply for your own exemption.
The local Weights and Measures Authority has been given the responsibility for enforcing the new regulations.
It will be an offence for a landlord to allow a letting to continue in a property in breach of the regulations or to register false information on the exemption’s register. The penalties for letting a property in breach of the regulations are:
- £5,000 or up to 10% of the rateable value of the property (up to a maximum of £50,000) if the breach has subsisted for less than three months; and
- £10,000 or up to 20% of the rateable value of the property (up to a maximum of £150,000) if the breach has subsisted for more than three months.
The penalty for submitting false information to the exemption register is £5,000.
Issues for Property Owners
On buying a property, it is vital that proper due diligence is carried out in respect of its EPC rating and into any exemptions which are being claimed by the current landlord. If you are selling a property, you should ensure that the EPC certificates provided to the buyer are accurate and that the exemption register is up to date.
As a landlord, it is unlikely that you will be able to force a tenant to carry out energy efficiency works unless the terms of the lease provide for this. There may be scope to recover the costs for efficiency works carried out to common parts of a building but this will have to be assessed on a lease by lease basis. A tenant should be aware that landlords may try to incorporate the cost of energy efficiency improvements costs within any dilapidations claim at the end of the lease.
Funders will be concerned to ensure that their security is not prejudiced by the inability of the borrower to let the property when the regulations come into force. In addition, a funder may want to assess the potential costs that a borrower could face in bringing the property up to the standards required by the energy efficiency regulations.
As a landlord, it is vital that any necessary steps are taken now to either gear up to comply with the new regulations or to log an exemption. As a seller or buyer of property, due diligence around EPC’s is likely to become much more thorough.
If you have any queries about the regulations and how they may affect your property please do not hesitate to contact Ben Lamb on firstname.lastname@example.org or 0113 227 3639.
A full English Brexit?
Love it, loathe it, vote for it or not, Brexit is a fundamental shift in the fabric of our society. The UK has been in the EU (or EEC as it was formerly known) for 43 years. We joined on 1 January 1973 following an accession treaty entered into on 22 January 1972 (along with Denmark and Ireland). The decision to join was made by the government at the time and there was no referendum on whether to join. As the government starts formal divorce proceedings, we will all be affected to a larger or lesser extent.
The Remain campaign suggested an horrific slump and vicious recession following the referendum. So far, whilst there was a slowdown in activity pre 23 June 2016, neither of these predictions have come true. The markets, whilst initially falling, quickly rallied and although growth forecasts have been down-graded, the mood appears to be business as usual.
The invoking of Article 50 of the Lisbon Treaty (which Gordon Brown took great pains to avoid being photographed signing) and our eventual departure from the EU will undoubtedly cause further uncertainty and, as such, volatility in the markets. Certainly we are in for a turbulent time over the next few years, but is this a reaction to the unfolding events triggered by the referendum result or is it more reflective of a deeper malaise as we saw in 2008? Hopefully not, but it does bear closer examination.
In 2008 we had been through a unprecedented decade of growth, with stable and affordable interest rates and, more importantly, freely available credit. Most if not all transactions were highly geared and there was an expectation that prices would simply continue to rise and cushion any potential bumps in the road. We all know what happened next. The fall in values during the recession pushed all the highly geared deals into difficulties. The almost total absence of any sort of credit meant that unless people had 100% equity to acquire distressed assets, there was simply no exit for either banks or investors.
Nine years on, we have seen a gradual stabilization and latterly growth in asset values and more credit coming to the market both via high street banking institutions, by funds and external investors. Businesses have largely weaned themselves off the high levels of credit they had previously enjoyed and are being more choosey about who to borrow from. Pricing is often taking a back seat to being able to trust that a lender will not pull the rug from underneath you because of a policy change. The property world is starting to resemble a stable, sensible and growing market as once it was.
So then, how will Brexit impact upon this? Well, as referred to above, there will be ups and downs over the next few years but we should all continue to acknowledge the fundamentals. Interest rates are low and will remain so for some time. Whilst growth forecasts have been cut, they are still in positive territory and there is no reason to put off that deal in the hope that rates will fall. We have had years of stagnation of property stock which has created a pent up demand (look at the cranes outside your windows ) and most of us are starting this economic phase having a sensible level of debt. Further, the central banks are alive to the dangers of a credit crunch and the latest funding for lending initiative from the Bank of England shows they are determined to ensure there is no repeat of that particular aspect of 2008. The hit to sterling, whilst affecting my summer holiday to France, will ensure the UK remains attractive to external investment provided they do not lose confidence in our sector.
Ultimately, Brexit will undoubtedly cause worry and headaches and make life more difficult over the next few years and there is always the risk of another recession in the UK if crises occur elsewehere given the interconnectedness of global economies. However, we must retain confidence in the fundamentals of the UK property market. After all, if we do not have confidence in it, why should anybody else?
If you have any queries about this article please do not hesitate to contact Martin Grange on email@example.com or 0113 336 3319.
Only fools rush in…. Exploring the conflict between a landlord’s right to redevelop premises and a tenant’s right to quiet enjoyment
In the recent High Court case of Timothy Taylor Limited v Mayfair House Corporation and another  EWHC 1075, Timothy Taylor Limited occupied a ground floor and basement of premises in Mayfair as a high class art gallery under a 20-year lease. The landlord began redevelopment work to the upper floors of the building to increase the number of residential units available for letting. After numerous complaints about noise and disruption, the tenant applied for an injunction to control the ongoing works and also made a claim for damages. In particular, the tenant took issue with scaffolding surrounding the building which obscured the premises and affected the tenant’s ability to take deliveries and access the premises.
The lease contained a standard covenant that the landlord granted the tenant quiet enjoyment of the premises. However, it also contained a right for the landlord to erect scaffolding to re-develop the building provided that it did not materially adversely restrict access or the use and enjoyment of the premises. The landlord also benefitted from a right to allow it to re-develop the building, even if this materially affected the tenant’s business or its use and enjoyment of the premises.
The Court determined that the rights that the landlord benefitted from in the lease did not give it an “untrammelled” right to build and re-develop. The landlord had to exercise its rights in a way which was reasonable and which minimised disruption to the tenant. The key factors in reaching this decision were:
- Tenant’s knowledge at the date of the lease
During lease negotiations the tenant had only been given general information which was not enough to understand the extent of works and their possible effect.
- Offer of compensation
The landlord had not offered the tenant any compensation or discount as a result of the disturbance caused to the tenant by the works.
- Reason for the works and who was to benefit
The works only benefited the landlord and the works were not required to keep the building in repair.
- Steps taken by the landlord to minimise disruption
A different design of scaffolding could have significantly reduced the impact on the visibility of the premises. In addition, the landlord had positioned a hoist close to the entrance to the gallery which unreasonably restricted access. Further, the landlord had failed to provide detailed advance notice of the nature of the work.
The Court determined that the landlord had acted unreasonably and awarded damages to the tenant even though the tenant’s revenues had actually increased during the duration of works. The damages were also awarded in lieu of an injunction.
Landlords have been sent a clear message. Even if a lease contains a right allowing a landlord to re-develop a building which contains a tenant, a landlord must consult with tenants to ensure that works are undertaken in a way which minimises disruption. Landlords planning such works would do well to review the guidance given by the Court in this case to reduce the likelihood of delays and expenses incurred by tenants applying for injunctions and bringing claims for damages.
If you have any queries about this article please do not hesitate to contact Gina Rhodes on firstname.lastname@example.org or 0113 222 3211.