Reducing energy consumption of buildings is a moral obligation and for landlords, it’s now a complex legal obligation, too. Jonathan Price explores the requirements for net zero targets in the UK and how this will impact flexible space operators.
This article was originally published by Allwork.Space.
Most developed countries in the world recognize the need to reduce the energy consumption of buildings as part of our efforts to decarbonize our economies, to reduce the risk of damaging climate change.
Even those who are skeptical about climate change see the sense in making buildings more energy efficient, and the need to do so will only have been reinforced by the recent spike in energy costs.
Different states, different codes
The U.S. does not have a national energy code for buildings.
Instead, it’s up to the states and municipalities to adopt codes. Guidelines for local codes are based on national model codes, or states develop their own codes.
Major states such as California and New York already have rules focussed on energy efficiency. For example, the California Energy Commission (CEC) Title 24, building standards code, is a broad set of requirements for “energy conservation, green design, construction and maintenance, fire and life safety, and accessibility”, and New York City’s Local Law 97, passed in 2019, affecting most commercial buildings over 25,000 square feet, aims to reduce building-based emissions by 40 percent by 2030 (from a 2005 baseline) and impacts over 57,000 buildings across the city.
For more than 35 years, the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1 has guided the energy-efficient design of buildings. This standard is a parallel standard to the International Energy Conservation Code (IECC). These codes are updated on staggered three-year cycles and have a big influence on local codes.
Because the position in the US is complicated by the existence of so many different codes, this article will focus instead on the position in the UK, as it presents perhaps the clearest example of the challenges facing building owners in complying with climate driven rules and regulations.
The challenges of complying with climate driven rules
The UK has a system of first assessing the performance of every building for rent, and then applying controls to those buildings based on those performance ratings.
Since October 2008, all rental properties, residential or commercial, have had to have an Energy Performance Certificate (EPC). These certificates serve to rate the energy efficiency of the building and range from A to G, A being the best and G the worst. The EPCs are awarded by building surveyors with specialist training.
Under the Minimum Energy Efficiency Standards (MEES) all buildings offered for rent and all commercial buildings offered for sale since 2018 have had to have a minimum EPC rating of E.
From April 2023 the minimum requirement of an E EPC will extend to all leases, not just new ones. It was announced last year that the standard for new leases would be tightened to C from 2025, and extended to existing leases by 2027. There are plans to tighten the rules further to require a B certificate from 2028, and to extend to existing leases by 2030.
Penalties for sub-standard buildings
To be clear what these rules imply, unless a building reaches the minimum applicable standard, it cannot lawfully be leased, or if it is already leased, the lease would become illegal if the minimum standard is not maintained, thus risking assets becoming ‘stranded’ or essentially valueless.
It is already unlawful to enter into a new lease on a building with an F or G rating.
The penalty for breach of these standards, by granting a new lease in the absence of the required EPC, for example, is a fine of 10%-20% of the rateable value of the property, currently capped at £150,000.
As might be expected for a country with a high proportion of old buildings, those listed by English Heritage for their architectural historical importance are not within the MEES standards and do not require an EPC, though this may change in the future.
Even if the Standards are extended to cover listed historic buildings, the application is likely to be “Insofar as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance.” So HM Queen Elizabeth II is probably safe from having to get an EPC for Windsor Castle.
In order to prevent money being wasted on work that is not cost effective, there are also time-limited exemptions related to the energy savings achievable in each particular building.
These exemptions are of two types, the first is that work is only required if it has a payback period of seven years or less, so that the cost of the work can be recouped through energy cost savings within seven years; and the second is that the owner is exempt if it can show that the building has reached the highest rating that is possible using cost-effective measures.
These two exemptions are granted for a maximum period of five years, though they can be as short as six months, and must be re-applied for when they expire.
Implications for coworking
If this all sounds like a big headache, it is, at least for the traditional landlord and tenant. Coworking clients taking the usual 2-20 desks in a business centre will not need to worry as all these items will be handled by their coworking host.
From a coworking operator’s point of view, the good news is that short leases under six months and licences are not within the MEES standards regime, so coworking operators are not generally responsible for undertaking the remedial work, unless they own their building(s) and use an opco/propco operating structure, with a property-owning company leasing the building to an operating company, which some do.
Where these standards are likely to be felt by coworking companies is when they come to take on new leases or to renew existing leases, as landlords will be seeking to recoup the cost of the remedial works through the rent charged. Whether a landlord would be able to increase the rent during the term of an existing lease would depend on the terms of the lease.
If a coworking company takes a lease of a building on a ‘shell and core’ basis, it may be the tenant’s fit-out that has to bring the building up to the relevant MEES standard, so these costs will need to factored into the revenue and cost projections for the building.
In this situation, the tenant will generally have six months to undertake the required work.
Long-term energy and cost savings
Overall buildings will become more expensive to buy or to rent, but cheaper to run. Landlords and tenants will also have an additional set of compliance issues to consider before entering into a new lease.
There are two critical dates to be aware of: April 1st 2027 and 2030, as these are the dates from which the minimum C and B EPCs respectively will be required.
It is likely that some, perhaps even many building owners, will leave it to the last minute to undertake the required remedial work. Given the limited number of contractors experienced at this kind of work and the shortage of skilled construction staff in the labour market, any owner waiting until the last minute is likely to be faced with very expensive quotations for this mandatory work.
It is therefore strongly recommended not to wait until the last moment.
Property owners should thus undertake the required energy performance survey and plan any remedial work as soon as possible, so as not to risk being penalized for failing to meet the critical deadlines or having to pay more than necessary to get the work done in time.
“A moral and a legal obligation”
Although the rules may differ in different places, the principles will be the same worldwide.
Emissions from the built environment cause a major part of carbon emissions, and building owners have a moral as well as a legal obligation to minimize their contribution to this problem.
For other businesses thinking about the future of work and the workspace they will need going forward, energy performance standards and all the compliance reporting they bring with it can be yet another reason to choose to outsource the space requirement to the professional operator and get rid of all the headache.