ESG and Real Estate: Green Targets for Commercial Landlords

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ESG and Real Estate: Green Targets for Commercial Landlords

What is ESG?  ESG is the now widely heard initialism for “Environmental”, “Social” and “Governance” which is used to describe a set of standards applied to businesses to measure their sustainability and ethical practices. Positive ESG credentials are often used by businesses in self-promotion, by investors and are increasingly the driver behind new statutory frameworks.

Environmental influences are increasingly impacting UK property law and one of the forerunners of this is The Minimum Energy Efficiency Standards (MEES).

MEES established in The Energy Efficiency (Private Rented property) (England and Wales) Regulations 2015 were first implemented in April 2018 and required landlords granting a new lease of a commercial premises to hold an energy performance certificate (EPC) with a rating of E or above for the property, unless they have a registered valid exemption. From 1 April 2023, it became unlawful to continue to sub-let a commercial property with an EPC of F or G. 

The UK government has previously viewed the improvement of EPC ratings as playing a pivotal role in achieving its goal of net zero by 2050. In November 2022, during the COP27 climate summit in Egypt, Prime Minister Rishi Sunak suggested that the UK were on course to fulfil its “ambitious commitment to reduce emissions by at least 68% by 2030”.

However, Mr Sunak has recently announced that the UK government is pushing back its deadlines on some of its green commitments. Whilst there are reports that ‘rules forcing landlords to upgrade energy efficiency will be scrapped’ the government are yet to set out precisely what that means going forwards. Reports also mention ‘homes’ which could mean that commercial and residential properties are treated differently?  

Before the government’s recent announcement, there were indications that 1 April 2027 would be the next target date for increasing the MEES rating requirement to a minimum rating of C, followed by a further target of an increase to a minimum rating B from 1 April 2030.

However, given the unpredictable nature of future government policy there is no guarantee that these proposed targets will be delayed and even if they are, they may be re-introduced following the next election. Commercial landlords should therefore still be aware of the EPC rating of their properties and aim improve the ratings before the predicted deadlines.

Further, landlords should also focus on the happy by-products of an improved EPC. Making a building more environmentally friendly increases the energy efficiency which has a knock on effect of reducing energy bills, both of which will make the property more attractive to tenants which will in turn improve the value. Many prestigious city centre commercial developments are now focusing sustainability as the key marketing feature.    

MEES is now having a direct effect on commercial property asset management with the introduction of ‘green’ lease clauses protecting the property’s EPC rating, EPC reduction a legitimate factor in considering consents for alterations and a more collaborative approach on reinstatement works and dilapidations.

We have worked on a very recent example connected to lease renewal proceedings for a commercial warehouse. Both the landlord and the tenant were keen to renew and the landlord was keen to update the lease, in line with current practices, by inserting a ‘green’ lease seeking to prevent the tenant from doing anything to reduce the EPC rating for the property. However heath and safety regulations required a minimum warehouse temperature for the tenant’s employees and the tenant wanted to install a heating system to achieve this; the likely result of which would have been a reduction in the EPC rating. Whilst we were able in this example to find a work around which maintained the EPC and provided the requisite heating, situations such as this are expected to provide fertile ground for future landlord and tenant disputes.     

Government policy will dictate the pace of change for EPC ratings, but change is here to stay. Commercial landlords and tenants need to become further attuned to the impact of ESG on ownership and occupation of commercial property to avoid any awkward and unwelcome surprises in the coming years.   

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