Synopsis
From April 2008, it will become necessary for property owners in England and Wales to obtain an Energy Performance Certificate before marketing larger commercial buildings for sale or lease, and the obligation will apply to all commercial buildings from October 2008. The initial impact is likely to be that more preparation time will be needed before a building can be marketed. Ultimately it is hoped that owners who have information about the energy efficiency of their buildings will be encouraged to upgrade them, and occupiers, mindful of corporate social responsibility and the need to attract the best talent, will start to demand more efficient buildings.
Background
On 16 February 2005 the Kyoto Protocol became a legally binding treaty. The Protocol (originally agreed in 1997, based on principles set out in a framework convention signed in 1992) is an international agreement setting targets for industrialised countries to cut their greenhouse gas emissions. The European Union (EU) is a signatory to the Protocol and has agreed to cut its emissions by 8 percent by 2012.
With an eye on the Protocol (even though, at the time, it had not been ratified), the EU implemented the Energy Performance of Buildings Directive on 5 January 2003. The Directive aims to cut the energy consumption in the buildings sector which, it is estimated, accounts for approximately 40 percent of the total energy consumed within the EU. It is estimated that improving the energy efficiency of buildings could help to cut carbon emissions in the buildings sector by up to 22 percent.
EU member states had until 4 January 2006 to implement the Directive, with an additional three years to implement specific provisions about energy performance certificates, the inspection of boilers and the inspection of air conditioning systems.
In the UK, the Directive (which requires domestic legislation to be passed in each EU country) is being implemented separately within England and Wales, Scotland and Northern Ireland. Other EU countries are also introducing similar legislation, or will be doing so shortly, although in many cases the requirements are less onerous than those applicable to England and Wales.
The New Requirements
The legislation applicable to commercial properties in England and Wales comprises three specific requirements:
• Energy performance certificates (EPCs) and recommendations for improvement of the energy performance of buildings have to be produced when buildings are constructed, sold or rented. The introduction of EPCs for commercial properties in England and Wales is the subject of this article (similar arrangements were put in place for residential properties in 2007).
• From 1 October 2008, display energy certificates (DECs) recording actual energy use will have to be displayed in larger buildings occupied by public authorities and by institutions providing public services to, and visited by, a large number of persons, and advisory reports making recommendations for improvement of the energy performance of the building have to be produced. This is not dealt with further in this article for reasons of space.
• From January 2009 air-conditioning systems over 12kW will need to be inspected at regular intervals not exceeding five years.
Within England and Wales, these requirements are prescribed in detail in the Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 (as amended). Separate arrangements are being made in the other two parts of the United Kingdom (Scotland and Northern Ireland) and are not covered by this article.
Implementation of the regulations is taking place in phases, to ensure (so far as possible) that sufficient energy assessors will be trained in time. The first EPCs will be required for the largest buildings for transactions taking place on or after 6 April 2008.
Buildings
The regulations apply only to "buildings." A building is defined as "a roofed construction having walls, for which energy is used to condition the indoor climate, and a reference to a building including a reference to a part of a building which has been designed or altered to be used separately."
This last phrase has important implications for larger buildings that are divided into smaller lettable parts such as units within a shopping centre or floors within an office building. Depending upon the layout of the building, it may be possible to obtain one certificate that relates to the entire building (where, for example, it is being sold in its entirety), but there appear to be cases where this will not be permitted, and it will instead be necessary to obtain separate certificates for each individual part of the building. The Government has issued non-binding guidance that sets out to explain how the requirements apply to different types of building, according to whether the parts do or do not share a heating and ventilation system, and whether or not any common areas are conditioned.
Certain buildings are exempt entirely from the regulations:
• Places of worship;
• Temporary buildings with a planned time of use of two years or less;
• Industrial sites, workshops and non-residential agricultural buildings with low energy demand;
• Stand-alone buildings with a total useful floor area of less than 50 square metres (approx. 500 sq. ft.);
• Properties that are due to be demolished, subject to certain safeguards to prevent avoidance of the regulations, and
• Perhaps, transactions that do not involve a genuine sale or letting, although the scope of this exception is rather unclear.
Form And Content Of Energy Performance Certificates
EPCs will indicate the "asset rating" of a building, expressed by reference to a scale from A to G (A being very efficient and G being inefficient), in the same way as white goods are rated on a similar scale. The asset rating will take account of the energy performance of the building's fabric and services, but will assume standardised energy usage patterns, to enable a prospective buyer or tenant to compare the energy performance of different buildings. The rating will effectively be showing the carbon emissions per unit area of the building.
EPCs will be issued by an "energy assessor" who will need to be accredited by one of (currently) twelve approved organisations. The certificates will be accompanied by "recommendation reports" that recommend improvements to the energy performance of the building (although no-one will be under any duty to act on these reports).
EPCs will initially be valid for ten years, although it is likely that the Government will reduce the period of validity over time, to perhaps as short as two or three years. A later EPC will supersede an earlier one.
Responsibility for the production of an EPC rests with the seller, landlord or builder, who must make the certificate available, at his own cost, to any prospective buyer or tenant at the earliest opportunity. Effectively a building for which an EPC is required cannot be marketed until the EPC has been obtained. In the case of a new building, the builder will be required to obtain an EPC before the building control inspector issues a completion certificate.
Alterations to a building will also trigger the requirement for an EPC, but only where the alterations result in fewer or more parts designed or altered for separate use and the modification includes the provision or extension of any fixed services for heating, hot water, air-conditioning or mechanical ventilation.
Implementation of the regulations is taking place in phases, to ensure (so far as possible) that sufficient energy assessors will be trained in time. The timetable is as follows:
6 April 2008 - EPCs will be required on the construction, sale or letting of commercial buildings with a gross floor area of 10,000 square metres (approx. 100,000 sq. ft.);
1 July 2008 - EPCs required on the construction, sale or letting of commercial buildings with a gross floor area of 2,500 square metres (approx. 25,000 sq. ft.);
1 October 2008 - EPCs required on the construction, sale or letting of all commercial buildings.
Obtaining An EPC
A number of different computer-based methodologies have been developed for different types of building. Assessment will require information about the size, specification and use of different parts of the building to be input into the computer program, which will calculate the building's rating. The assessor will need scale plans of the building's interior and will need to visit the building in most cases. The cost of an EPC is likely to range from £1,000 upwards (perhaps to tens of thousands of pounds in the case of complex buildings). A shortage of trained assessors at the start is likely to increase the cost, particularly if (as has been suggested) large investors decide to obtain EPCs for all their buildings this year, instead of waiting until a sale or letting is imminent. It is thought that the Government may have underestimated the number of assessors that will be required.
Incentives To Compliance
Sanctions for non-compliance are limited to non-criminal penalties levied by local authority trading standards officers. The penalty has been fixed at 12.5 percent of the rateable value of the building, subject to a maximum of £5,000. It will be a defence to show that marketing without an EPC took place because no certificate could have been obtained within a period of 14 days.
These penalties are relatively low and it is likely that concerns over corporate social responsibility policies and the need to attract the best talent will be higher in organisations' consciousness than the penalties themselves. Indeed, it is unclear how much, if any, resource will be available to local authorities for enforcement purposes.
Two years ago, the idea that it would soon be necessary to obtain a certificate recording a building's energy efficiency before marketing it was considered unwarranted. However, since then, the realisation within the UK, and Western Europe as whole, that carbon reduction targets have to be taken seriously, coupled with the increasing cost of energy, means that EPCs are quickly likely to become an essential tool for occupiers and investors alike.
This article is intended as general guidance only and is not a substitute for detailed advice on specific circumstances.
Published April 1, 2008.
