why green leases?
Summary
The last two years have seen the introduction of more environmental regulations affecting commercial property than in the previous two decades. January 2009 saw the introduction of Energy Performance Certificates for commercial properties. April 2010 saw the establishment of a UK-wide carbon emission trading scheme for properties occupied by major energy-users. October 2010 sees a new set of Building Regulations designed to promote energy efficiency. More environmental measures are set to follow under the combination of the Climate Change Act 2008 and the Climate Change (Scotland) Act 2009. Whilst measures passed to date have to date only really had a major impact on large energy users, small and medium sized businesses or enterprises (SMEs) can expect within 5 to 10 years’ time to feel the full effects of environmental measures.
The practical effects for tenants are likely to mean the difficulty of being able to assign or sub-let commercial properties and increased running costs for low-energy efficient buildings.
Reasons for the likely increase in adoption of green leases
Energy Performance Certificates
First, the introduction of Energy Performance Certificates in 2009 means that the energy efficiency or otherwise of commercial buildings will become an increasingly significant consideration for owners and tenants. These rules (for public buildings) are to be tightened further as from January 2009 and it can be expected that the same will apply to commercial properties. Whilst, as at summer 2010, we cannot know when those will be extended to commercial properties, it seems an inevitability that they will be.
We predict that the impact of EPCs over the next 5 to 10 years is likely to involve:
- for owners who hold properties primarily as investments either a fall in value of properties rated as having a low score on an EPC or greater difficulty in being able to sell such a property.
- for owners who trade from their properties, the risk of low EPC scores being linked to assessment of commercial rates, with increased running costs for low-energy efficient buildings
- for tenants the difficulty of being able to assign or sub-let commercial properties and increased running costs for low-energy efficient buildings and the risk of low EPC scores being linked to assessment of commercial rates, with increased running costs for low-energy efficient buildings
CRC Energy Efficiency Scheme and carbon-emission penalties
April 2010 saw the introduction of the Carbon Reduction Commitment Energy Efficiency Scheme. Currently, this applies only to major energy consumers, meaning any organisation, including the public sector, using more than 6,000 megawatts in 2008. It is very likely, though, that as the purpose of the CRC scheme is to curb carbon emissions and that as UK emissions have already fallen by 8.6% in 2009 alone, it will be extended over the next 5 to 10 years to include SMEs.
If the CRC scheme is extended to properties owned or occupied by SMEs, the practical consequences are likely to be:
- increased business costs in the form of a further levy on the SME’s emissions, and/or
- adoption of measures to restrict carbon emissions