Sustainability was scarcely an issue for either the retail or property industries five years ago, but now it’s never far from the top of the agenda. The sustainability movement has snowballed over the past few years, and retail property now faces the first tangible piece of Government legislation to turn rhetoric into action – Energy Performance Certificates (EPCs).
EPCs are a system for grading buildings on their energy efficiency and providing recommendations for improvements to be made. The Government is rolling out the certificates in three stages, the first of which was introduced on April 6. By the end of the year, it will have laid the foundations for greener projects in the future.
While EPCs will primarily be a concern for landlords, the move is significant for retailers too. Where retailers own the freehold of a store, the responsibility will fall on them to provide the EPC. At stake is a retailer’s reputation in an increasingly eco-conscious age, but many still feel ill-equipped to get in line with the legislation and there could be red faces once the reforms take shape.
EPCs have been largely accepted and welcomed by the property industry. While the extra costs – and who should foot the bill – are an issue, the bigger concern of reducing carbon emissions is now a part of the overall consciousness. But some are asking if the legislation goes far enough and are also critical of the Government’s communication of the plans.
“There are still a lot of people in the market who don’t know what they need to know,” explains Fabian Joly-de-Bresillon, who heads the energy services team at Bureau Veritas, a company that provides EPCs to landlords. “In terms of the way this has been handled, it’s been a bit rushed to meet the deadline of the European regulation.”
On January 5, 2003, the European Commission’s Directive on the Energy Performance of Buildings became law. This complex and weighty directive included the requirement for member states to introduce EPCs within six years and with just nine months to go the Government has unveiled the first phase of its part of the deal.
The aim of the directive was to bring Europe in line with targets laid down under the Kyoto Protocol. It was based on the findings of European Commission research, which revealed that 40 per cent of energy consumption in Europe comes from buildings – a figure it believes it can cut by 22 per cent.
Under the new legislation, all commercial buildings will be graded between A and G depending on how efficient they are, with the best performers receiving an A grade. The aim is to provide a clear picture of a building’s energy efficiency so that a potential buyer or tenant can make an informed decision before committing to a property.
Under the first wave of legislation, which came in on April 6, owners or occupiers of all commercial buildings over 107,640 sq ft (10,000 sq m) that are being built, sold or let can apply for EPCs. By the time the third roll-out date has come, in October, this will apply to all commercial buildings and be a legal requirement across the board. An 11th-hour reversal by the Government has postponed the date EPCs become mandatory to the end of the roll-out period, because the number of fully trained inspectors was far short of the target that it had originally set itself.
Because of the Government’s haste in bringing in the legislation, the short-term effects are likely to be fairly insignificant. The fact that it has had to postpone the date when EPCs become compulsory speaks volumes for the Government’s state of preparedness in unveiling the change. This makes it very unlikely that any real effects will be felt immediately. Over the next 12 months there is likely to be a lot of confusion among landlords, tenants and the Government as all parties find themselves in varying states of readiness.
But, in the medium and long term, the benefits could be substantial. When the dust settles, retailers will be able to make informed choices about the energy efficiency of the buildings they occupy, which in turn could save money on heating and lighting the store. The proof that EPCs have had a real impact will start to emerge over the next 10 years, as new developments come to fruition that have been conceived with energy efficiency in mind from the design stage.
With an EPC to hand, a retailer considering occupying a unit will have a thorough breakdown of how energy-efficient a building is based on a comprehensive set of criteria (see box, right). The EPC will also include recommendations as to how faults can be remedied once a new tenant sets up shop.
As meticulous as this system may be, however, the new legislation will be without teeth. Assessors can identify the failings in a building’s energy performance and give advice on areas of improvement, but cannot enforce any changes or prevent a tenant or landlord taking over a poorly performing building. The fear is, in the short term at least, that location and profitability will still outweigh energy performance in the thinking of landlords and retailers.
“We could see retailers keen to convey their CSR values through choosing properties only with an A or B rating,” says a British Property Federation spokesman. “While EPCs may not legally enforce a certain level of energy performance, the Government is right to initially let retailers decide, in the free market, which properties they occupy.”
Another grey area is who will pick up the bill. The responsibility lies squarely with landlords to ensure that an EPC is in place on all of their buildings and in the case of shopping centres they will be obliged to provide retailers with an EPC on individual units free of charge. But in the case of a retailer owning the freehold, it will have to pay for an EPC to be properly carried out, as will be the case where a retailer sub-lets a store within a shopping centre.
However, extra costs for landlords will ultimately be paid for by their retail tenants. The Department of Communities and Local Government has published guidance notes on how landlords and tenants might negotiate this new cost and has proposed a series of possible solutions to the problem. These are: for the landlord to foot the bill entirely; for the tenant to pay the cost through an increased service charge; for the landlord and tenant to split the cost between them; or for the landlord to pay initially, but for the tenant to pay through a service charge as and when it requests a copy of the EPC.
The introduction of EPCs is a big leap forward. With a legislative framework now in place and tangible change happening, the Government has laid foundations that could appreciably reduce the carbon footprint of future retail property. But the changes that are being unveiled this year will only count fully if the Government treats them as a stepping stone to further reform.
“It’s certainly a positive thing, but I see it as a starting point,” says Land Securities head of engineering and energy Phil Osborn. “What the Government can’t do is stop here. They have got to carry it on.”
The next stage will be to ensure that the recommendations that are included in each EPC become requirements on retailers and landlords. Given that this is likely, retailers would be well advised to start thinking green now if they are to avoid running into difficulties further along the line.
Without the power to enforce recommendations, EPCs could, in the short term, become something that landlords and tenants see as a tedious formality rather than an incentive to embrace real change. But this would be unwise and short-sighted, given the opportunity for long-term change that EPCs present, and the likelihood is that reform now will be followed by more coercive legislation in the future.
As Heatons LLP head of commercial property Nick Trowell says: “You’d be more prudent to buy a ‘greener’ building because of what might come along in the future.”
What will the EPC assessors be looking for?
Retail property owners will need to be ready for an inspection. The following checklist provides a clear breakdown on what the assessors will be examining:
What a building is used for
The layout of a building (roof, windows, doors and floors)
Heating and hot water systems
Any provisions for the generation of renewable energy
Timetable for EPC roll-out
April 6, 2008
EPCs required for the construction, sale or rent of commercial buildings with a floor area over 107,640 sq ft (10,000 sq m).
July 1, 2008
EPCs required for the construction, sale or rent of commercial buildings with a floor area over 26,910 sq ft (2,500 sq m).
October 1, 2008
EPCs required on the construction, sale or rent of all commercial buildings.