Break Down the Barriers to Greener Properties
Fred Lee, Senior Counsel, and Monopoly Christiaan-Rakus, Associate at UK law firm Farrer & Co, highlight ways landlords can improve energy efficiency.
Developing sustainable approaches has fast become a priority of the tenanted property sector for both landlords and tenants. This was the case in 2022, as explored in a previous article giving an overview of the most common sustainability initiatives being adopted. Since then, the landscape has changed, but the issue of sustainability has remained a top priority.
In fact, there is a strong case to argue that it is now the most pressing issue that stakeholders in the sector face. Following various regulatory updates under both the old and new governments, and with frameworks such as the Minimum Energy Efficiency Standards (MEES) being tightened, the urgency with which sustainability efforts must be enacted has upped. It now seems timely, therefore, to update our narrative.
The UK Climate Change Committee’s 2024 Progress Report highlights that over three-quarters of necessary emissions reductions for the next three carbon budgets will come from non-energy sectors, such as construction.
These sectors must accelerate fast to meet targets and to avoid property assets falling into obsolescence. As a result, the sustainability rating and energy performance of properties are becoming critical to maintaining asset value. Many property investors are exploring green initiatives to enhance sustainability.
This article outlines a range of ways that property owners, and their tenants, may consider improving asset sustainability, along with potential barriers they may face in implementing these measures.
The growing role of EV charging points
To meet sustainability objectives, one avenue property owners may consider is to install EV charging points (EVCPs). This is especially attractive to potential tenants that may have their own sustainable travel plans. August 2023 to August 2024 saw a 41% increase in EVCP installation in the UK; the trend is accelerating and will continue to, for both landlords and tenants.
In addition, the 2022 Building Regulation Part S requires the following developments to have at least one EVCP:
All new residential buildings with an associated parking space;
All non-residential buildings undergoing a major renovation with more than 10 parking spaces;
All new non-residential buildings with more than 10 parking spaces; and
From 2025, existing non-residential buildings with more than 20 parking spaces.
Co-operation on green lease provisions
Landlords are also increasingly including ‘green lease’ provisions within letting portfolios. These provisions put obligations on both parties to agree to cooperate on improving a property’s environmental performance and share energy consumption data. Some leases go further, with the parties committing to operate buildings to net zero standards.
However, challenges arise in deciding who should cover the costs of environmental improvements. Landlords may hesitate to invest in energy efficiency when tenants benefit from lower bills, while monitoring tenant compliance with net zero goals can be complex. Tenants, especially those on short-term leases, are also reluctant to invest in sustainability measures when the benefits are only realised in the long term.
In our experience, these potential setbacks to making progress on baking sustainability into leasehold agreements can be overcome through evenly-drafted lease provisions which enable the parties to collaborate to improve energy performance. There is a mutual benefit to be achieved here, as the parties can reduce carbon emission and utilities expenditure and, at the same time, move closer towards their respective sustainability targets.
PV cell installations
Following COP26 in 2021, photovoltaic technology (PV cells) was promoted as a cost-efficient investment to reduce utility bills. These also provide the opportunity to sell the unused electricity back to the grid via feed-in tariffs; boosting asset sustainability and making properties more attractive for tenants due to lower utility costs.
Landlords normally install the PV cells, retaining ownership over the equipment, and charge the maintenance costs through the service charge. Property owners may permit tenants to install and maintain PV cells when they lease whole sites.
Key challenges include determining responsibility for upgrades and maintenance, as well as how profits from surplus energy sales are divided. Additionally, when leases come to an end, parties must decide if tenants should remove the equipment or if the landlord can purchase it if in workable condition.
Challenges and changes for the Landlord and Tenant Act 1954
With support from Farrer & Co, the British Property Federation and Savills recently published a high-profile research report, ‘Closing the Data Deficit’, focusing on the solutions and barriers to achieving net zero standards in tenanted buildings.
One of the findings of the report was that the outdated Landlord and Tenant Act 1954 (the 1954 Act poses a significant challenge to improving sustainability in properties let under tenancies inside the act. Renewal leases under the act must follow substantially the same terms as the previous lease, allowing for only reasonable modernisation. However, the act does not currently recognise green lease provisions aimed at improving energy efficiency as reasonable updates. This makes it difficult for landlords to enforce such provisions in lease renewals without tenant agreement.
On a positive note, the Law Commission will be reviewing the 1954 Act this autumn, with a focus on incorporating the net zero agenda. The consultation may also consider expanding Ground F to include energy efficiency upgrades or empower courts to require tenants to allow landlords access for sustainability improvements.
Protect your investment
Properties with sustainability and energy efficiency upgrades, such as green leases, can command higher rents and maintain greater value. Accordingly, property owners should focus on enhancing these features of their properties in order to attract tenants, buyers and lenders who have their own sustainability goals. Otherwise, from an asset management perspective, owners risk their properties remaining unlet and holding a diminished resale value, as any cost for bringing properties up to standard would instead be passed to a buyer.
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