Retail net zero goals to 2030 - Who will bear the cost?
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26 February 2021 26 February 2021
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UK & Europe
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UK Real Estate Insights
We look at the Government’s net zero goals for non-domestic properties by 2030 and the eagerly anticipated results of the consultation conducted in January 2020 with a particular focus on the retail sector and how associated costs and responsibilities may be shared between landlords and tenants.
The Energy White Paper, “Powering Our Net Zero Future”, sets a path to net zero emissions and tackling climate change as a pivotal objective this decade. Key to this is ensuring that non-domestic rental properties achieve a minimum EPC rating Band B and reducing business energy use by 20% by 2030.
The Government consultation closed in January 2020 and sought feedback on the aims set out in the White Paper. In particular, it focused on sharing costs and responsibilities between landlord and tenants. The outcome of the consultation has been delayed by the Coronavirus pandemic, but we expect focus will turn to it early this year as the Government’s 2030 ambitions remain a hot topic.
The retail sector is one of the highest energy consumers among non-domestic rented buildings and it has been particularly hard hit by the pandemic. It is therefore a good time to revisit the key points of the consultation and consider how the sector may be impacted.
Initial fit-out
Retail units are often handed to the tenant in a shell and core condition. The PRS Regulations (2015) currently place responsibility with landlords to ensure a minimum EPC Rating E (from April 2023 this will extend to all existing leases).
In the consultation, the Government sought feedback on the parameters of responsibility between landlords and tenants in complying with regulations and ensuring an EPC rating Band B is achieved. It recognises that initial works undertaken by landlords to improve energy efficiency could be undone by tenants during fit-out.
To ensure tenants comply and share costs, it may be that responsibilities need to be negotiated and agreed in heads of terms and documented in licences for works. The Better Buildings Partnership (BBP) published their collated responses to the consultation noting that examples of shared costs and their agreement in heads of terms have so far been few and far between.
The BBP stressed the need for Government guidance and suggested that a potential solution may be that leases are signed on the basis of a draft EPC assessment of the tenant fit-out specification (which should meet the minimum requirements), and a follow up EPC is produced on completion of the fit-out.
Ongoing costs
At present, the initial and ongoing cost of improving the energy efficiency of a non-domestic building are broadly shouldered by landlords. Despite this, the benefit of reduced bills and a more efficient premises are reaped by the businesses that lease them.
The cost of bills is relatively low comparative to the rent (anticipated at 3% of overall outgoings) so tenants are not incentivised to choose energy-efficient premises to save costs in the long term. This is exacerbated as recently, shorter leases have become more popular.
To incentivise landlords to meet the 2030 targets, this cost dilemma must be addressed. Again, it will be interesting to see if the results of the consultation identify how tenants can be encouraged to choose energy-efficient premises. There is likely to be increased emphasis on the fact that energy-efficient premises have the potential to increase staff productivity, health, and wellbeing in the workplace as well as reducing outgoings.
The consultation asked landlords to provide feedback on how they would seek to recover costs from tenants and how the cost/benefit dilemma can be overcome.
A shared goal
Many landlords and tenants are suffering the effects felt by the Covid-19 pandemic and will continue to do so for a few years to come. However, the collaboration we have seen over the previous year to grant rent concessions and keep premises occupied gives hope that the same collaborative approach could be applied to achieve the 2030 energy goals.
We eagerly await the results of the consultation to see if the Government will be prepared to offer further guidance or a financial or legislative helping hand to ensure landlords and tenants can work together to share the costs of becoming more energy-efficient by 2030 and beyond. It will be interesting to see if, in light of the pandemic, we see more assistance being offered than could have been anticipated a year ago.
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