COMMENT | New energy regulations could spark rise in disputes

Christopher Perrin, property litigation partner at the Manchester office of Irwin Mitchell, highlights a number of business issues in relation to the EPC minimum standard regulations.

Although there has been a great deal said about the impact on landlords and property investors concerning the impact of the new Energy Performance Certificate minimum standard, so far there appears to have been little discussion and analysis about the rise in the number of property disputes that will inevitably occur.

Earlier this year, the Government announced its response to the consultation on energy efficiency standards in property which resulted in the introduction of the Energy Efficiency Regulations 2015.

The new laws bring in a number of changes for the sector, including the requirement from April 2018 that commercial properties must have an EPC rating of at least E before a landlord can grant a new lease.

The Regulations will be introduced in phases and although the April 2018 deadline applies to the granting of new leases, it does also apply to existing tenants, so will therefore include lease renewals.

It is estimated that nearly 20% of non-domestic properties could be in the F & G bands and with regulations tightening all of the time some properties that are currently D & E rated may fall below the threshold in due course. With so many properties affected, the changes are likely to have an impact on the marketability and valuations of some properties as well as rent reviews. This has been well-documented, however there are a number of other issues that are worthy of consideration including the implication for dilapidations.

The issue of dilapidations relates to the obligations that tenants face at the end of the lease to return the property to the landlord in a good state of repair and condition. If a lease expires shortly before or after April 2018, some tenants could find that landlords demand M&E equipment is replaced with the latest energy efficient equipment.

Whether a tenant is liable or not will depend on the terms and conditions set out in the lease, but if the tenant is legally required to make good all alterations to the building such as changing all of the lights with expensive energy-efficient fittings, the costs of doing so could run into the tens of thousands of pounds. There are certain ways that a tenant can protect themselves from this, but it is worth looking at the current lease now to understand the risk.

It isn’t just dilapidation assessments which could lead to an increase in commercial property disputes as a result of these new laws. Another area to consider is the impact on service charge and the fact that the cost of bringing some properties up to the required standard will lead to many landlords looking to pass on all or a proportion of this expense to their tenants.

Of course, many businesses will be resistant to this, claiming that the service charge should only take into account the maintenance to the building rather than improvements, but it would be prudent to check first to ensure there aren’t any nasty surprises.

Again the answer will depend on how the lease is drafted in relation to service charge, but as the deadline gets closer, it’s worth examining this issue now in order to avoid being caught up in future litigation.