Advisers should be proactively contacting clients invested in commercial property to discuss whether they may be affected by new energy rules due to come into effect in less than 18 months’ time, says Nigel Bennett.
I have recently been talking to a number of advisers who have clients invested in commercial property and thus will be impacted by the Energy Act 2011. In mentioning this, you may think we are late to the party, but in fact the new rules do not come into effect until 1 April 2018.
They will have far-reaching consequences for advisers and their clients as it will be illegal to grant a tenancy on a property that is one of the two lowest bands, ‘F’ or ‘G’. Potentially, this could affect one in five properties.
This is a very high proportion and advisers are starting to raise the issue with clients, to ensure they are not caught out. It may seem a long way away but, if remedial work needs to be undertaken, it will fast be upon us.
There are due to be substantial fines handed out to anyone breaking the rules – ranging from £5,000 to £150,000, depending on the severity and also how long the rules have not been complied with. I should add that these rules are only for landlords in England and Wales – the Scottish Government is setting its own legislation and timetable. For those in Northern Ireland, there is no equivalent legislation.
Since 2008, it has been a legal requirement for anyone selling a property to have an Energy Performance Certificate (EPC). Commercial property EPCs are provided by non-domestic energy assessors and are usually valid for 10 years.
If the property falls into one of the lowest two bands, then it will be necessary to take measures to improve the property to a minimum ‘E’ rating. For some properties, this could be as simple as replacing incandescent light bulbs with energy efficient ones; for others much more substantial works may be needed.
The EPC will normally indicate any recommended improvements that should be considered, with an estimate of costs and what the likely annual savings will be.
The advisers we have been talking to are proactively contacting their clients to alert them to these new rules and helping them to revisit any previously produced EPC to assess whether they are likely to be affected.
They are encouraging clients to speak to an energy assessor now – particularly if the property has never had an EPC, or where the property is known to have a poor rating. Note that some of the first EPCs were produced on rather pessimistic assumptions, so a more up-to-date rating could result in an improvement without any work being required.
Depending on the rating and type of property, the cost of energy efficiency measures could be significant and the client may have to budget for some one-off expenditure. Some landlords may wish to adjust rents upwards at the next opportunity, although this may not always be possible.
Although we have yet to see any obvious signs of an impact from EPC ratings, anyone purchasing a property should consider whether they are comfortable with the rating and, if appropriate, take advice from a solicitor and/or energy assessor.
Some properties will have their market value and marketability significantly reduced as a result of the new legislation – possibly altering retirement plans for SIPP investors. Advisers therefore need to factor in these considerations when undertaking planning of this nature.
Nigel Bennett is sales and marketing director at InvestAcc