Growing demand for sustainable property options

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Despite the threat posed by the Omicron variant, large sections of society are opening up again and a new normal is becoming established, with figures in the Q3 2021 Commercial Property Monitor from RICS, confirming demand for offices increased across Europe.

This upswing in the commercial property market has coincided with an increased interest in the creation of green, sustainable commercial spaces, driven largely by the feeling a ‘tipping point’ has been reached in the perception of the
climate emergency.

rooftop solar energy, photovoltaic power generation in city

Consumer concern impacting commercial property choices

A range of global surveys have highlighted how consumers are now making purchasing and brand loyalty choices, based on the sustainability of the businesses with which they interact – a trend more marked following the pandemic

A 2021 UK survey published by Deloitte found 85% of consumers had adopted at least one lifestyle change to be more sustainable during the year, and 34% of consumers seek brands with strong sustainable credentials.

Combine these consumer preferences with government commitments to achieving net zero and the future for commercial properties is clear, at least as far as the energy performance certificate (EPC) rating required for a tenancy or lease to be entered into is concerned.

Landlords must understand an increasing number of organisations will seek more energy efficient buildings, as the pressure from consumers grows along the supply chain. The more urgent the climate emergency becomes, the more consumers will demand transparency and accountability from businesses and the supply chain of
those businesses.

Tenants are going to be asking more questions about building sustainability and energy efficiency because they will face the same questions from business partners and ultimately consumers.

Large commercial buildings to be star performers

The approach of the UK government will also need to be considered, given that consultations published in March 2021 clearly defined the future, in terms of the EPC ratings expected for non-domestic buildings and the energy and carbon performance of large commercial buildings.

This desire to tackle the carbon and energy performance of commercial buildings over 1,000 square metres recognises that while buildings of this type, such as larger office spaces, represent only 7% of all commercial buildings they are responsible for 53% of the energy used by commercial buildings.

For buildings of this size and complexity there is little correlation between the EPC rating awarded and the actual daily performance of the building. Which is why the government has suggested a system of annual ‘star ratings’ for the energy use and carbon emissions of
the buildings.

Owners and single tenants of commercial buildings larger than 1,000 square metres would have to obtain a rating annually and publish the result. The stated long-term aim is for higher ratings to translate into higher asset or rental value for the buildings that perform better and achieve higher ratings.

Taylor Walton Solicitors

Pay close attention to EPC ratings

Changes in how EPC ratings on commercial buildings are regarded will be of far more interest to the landlords and tenants of the other 93% of commercial and industrial buildings.

The EPC system has required, since April 1, 2018, that all commercial properties let on new tenancies had to have an EPC E rating as a minimum. From 2023, that minimum rating will apply to all private rented properties – commercial and domestic – regardless of a change in tenancy.

Currently, the proposed minimum EPC rating for a commercial building will move to EPC B by 2030, with an interim target of EPC C in 2027.

If a commercial building doesn’t have an EPC rating of E or better, then the organisation responsible is liable for a fine of up to £5,000 which could be levied repeatedly, by the relevant Trading Standards enforcement officer.

The new stricter rules are set to be supported by the introduction of a private rented sector (PRS) Exemptions and Compliance database to provide the data needed by local authorities responsible for enforcement, allied to updates to the
penalty framework.

Other proposals include:

Landlords having to provide a valid EPC certificate to letting agents before a property is put on the market

Letting agents and online property platforms only advertise and let properties that comply with the regulations

Local authorities free to use EPC Open Data for enforcement

It’s easy to understand the likely impact of these changes on the commercial non-domestic property market, with research from property agent Knight Frank finding that London office buildings achieving the highest BREEAM sustainability standards, could expect a 12.3% rent premium.

Also, the £1bn green office scheme in London’s Victoria Green will be the UK’s largest all-electric office, utilising ultra-low carbon construction, powered by renewable sources and looks set to become the rule rather the exception, as the pressure to embrace net zero impacts the commercial property sector.

These changes will require both landlords and tenants to work with legal advisers adept at drafting leases to the current statutory and practical requirements from both the perspectives of landlords and tenants. Typically, the earlier you start the conversation with your legal advisers, the better the outcome.