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Recent News

Commercial Property Investment & Energy Performance Certificates (EPCs)

Important Changes in Regulation

Background

Sanlam offers clients the opportunity to purchase and invest in commercial property located in England, Scotland and Wales via One SIPP and Transfer Pension Portfolio (S32) from our Specialist Range of Products.  Some existing commercial property investments are held via our Legacy Pension Products.

The energy used for heating and powering non-domestic buildings is responsible for around 12% of the UK’s emissions. It is estimated that around 60% of today’s non-domestic buildings will still exist in 2050, representing around 40-45% of the total floor space*.   

Energy Performance Certificates (EPCs) were introduced in 2007 as a requirement of the original Energy Performance of Buildings Directive - an EU measure designed to tackle climate change, by reducing the amount of carbon emissions produced by buildings. Currently, if selling, renting or building commercial property, a Commercial EPC is required.  

Accredited Energy Assessors carry out energy assessments on buildings and produce an EPC and a Recommendation Report, which normally lists cost effective and other measures (such as low and zero carbon generating systems) to improve the energy rating.  Comparatively minor changes in energy performance and the way each building is used will have a significant effect in reducing energy consumption (e.g. replacing halogen lightbulbs with Compact Fluorescent Lights (CFL) or Light Emitting Diodes (LEDs), or introducing a room thermostat for the heating system.

An EPC is valid for ten years and rates how energy efficient a property is using grades from A to G (with ‘A’ the most efficient grade).  The certificates allow owners, occupiers and prospective buyers, to see information on the energy efficiency and carbon emissions from their building, enabling them to consider energy efficiency and fuel costs as part of their tenancy/ownership.

What is changing and when?

The Energy Act 2011 introduced a requirement to improve the energy efficiency of privately rented properties in the residential and commercial property sectors.  The Government has now finalised new Minimum Energy Efficiency Standards (MEES) that will require eligible properties to be improved to a specified minimum standard before they can be re-let. 

The minimum level of energy efficiency provisions will mean that, subject to certain requirements and exemptions:
 
a) from 1 April 2018, landlords of non-domestic private rented properties (including public sector landlords) may not grant a tenancy to new or existing tenants if their property has an EPC rating of band F or G (shown on a valid Energy Performance Certificate for the property).
 
b) from 1 April 2023, landlords must not continue letting a non-domestic property which is already let if that property has an EPC rating of band F or G.
 
Where a landlord wishes to continue letting property which is currently sub-standard, they will first need to ensure that energy efficiency improvements are made which raise the rating to a minimum of E. In certain, limited, circumstances landlords may be able to claim an exemption from this prohibition on letting sub-standard property, this includes situations where all improvements which can be made have been made, and the property remains below an E.
 
Local Authorities will enforce the minimum standards. They may check whether a property meets the minimum level of energy efficiency.  Where an enforcement authority is satisfied that a property has been let in breach of the Regulations it may serve a penalty notice on the landlord imposing financial penalties, which depending on the length of breach, may range from up to £5,000, increasing to a maximum of £150,000, depending on the rateable value of the property.
 
Ultimately the legislation may at the very least fetter ability to sell or let the property and/or adversely impact the property valuation and therefore the member’s pension fund and ‘at retirement’ plans, or at worst, a fine could extinguish the liquidity within a member’s pension  and lead to an enforced sale of the Property.

What are Sanlam doing to help?

Over the next few months, our Commercial Property Team will be writing to clients who hold commercial properties within their Pension Funds. 
If we have not had sight of an EPC for a property or are not able to obtain a copy via the Non-Domestic EPC Register, we will make the Fund Members aware of the forthcoming legislation and implications, asking them to consider whether they wish to instruct an EPC Assessor.
 
Where we have sight of a valid EPC for a property, which shows a rating of less than E, we will make the Fund Members aware of the forthcoming legislation and implications, asking them to consider whether they wish to carry out the works required to raise the Energy Rating.  Such works can be paid for via the Pension Fund.
 
Where we have sight of a valid EPC for a property, which shows a rating of E or higher, we will simply make the Fund Members aware of the forthcoming legislation and implications, and highlight the fact that the EPC is only valid for ten years.

New Properties

Before we agree to purchase a property, we will require sight of a valid EPC, which should have been obtained before the property was marketed, and must be provided by the Seller before the property is sold.

If the property has an energy rating of less than an E, we require confirmation of the works that are required to raise the Energy Rating to an E or above and the expected cost of the works. We would approach the EPC Assessor for this information. If we proceed with the property purchase then it is likely we will require an undertaking as part of the purchase arrangement that work required to improve the rating to E or above will be carried out.  The Fund Members will need to agree and acknowledge that the works will need to be carried out in line with that undertaking. 

As the cost of such works would normally be met via their Pension Fund, sufficient cash would need to be available within the Pension Fund to fund those works.  The members will need to consider the extent that any requirement to fund improvement works and the timing of the works might affect their ability to access their pension benefits.

Sanlam will work with its Fund Members to ensure compliance with the Regulations.  However, if there is any doubt as to whether a property is required to have an EPC, or whether the property is perhaps exempt from having to comply with the regulations then appropriate expert advice should be sought.

Summary

For clients with a commercial property already held in their existing pension fund, work may be required to ensure that:

  • If a tenancy is renewed or a new lease is granted after 1 April 2018, the property must have an energy rating of E or higher;

  • By 31 March 2023, the property must have an energy rating of E or higher.

For clients wishing to purchase a commercial property for their pension fund:

  • The property must have an energy rating of E or higher.

OR

  • If the property has an energy rating of F or G, a schedule of works must be put in place to improve the rating to a minimum E rating within a specified timeframe.

* ”The Non-Domestic Private Rented Property Minimum Standard”, 2017

Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The information contained in this document is based on current understanding of legislation as at April 2017 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.