Since 1 October 2008, anyone wanting to sell a commercial property has first had to obtain an Energy Performance Certificate (EPC). Soon, EPCs will carry new, greater significance. They will potentially affect your ability to let out commercial properties in your SIPP or SSAS and the market value (and marketability) of those properties.
EPCs indicate the energy efficiency of the building fabric and the heating, ventilation, cooling and lighting systems. On the front of the EPC there is an ‘Energy Performance Asset Rating’ (EPAR), which is a combination of a letter (ranging from A to G) and a number (ranging from 0 to ‘over 150’). The higher the letter and number, the less energy efficient the building is.
“Soon, EPCs will carry new, greater significance. They will potentially affect your ability to let out commercial properties in your SIPP or SSAS and the market value (and marketability) of those properties.”
The EPAR is compared to two benchmarks for the type of building: one appropriate for new buildings, and one appropriate for existing buildings.
It will soon be against the law to let out a property with an EPAR in the two lowest bands, F and G.
The rules will apply to new lettings and lease renewals (commercial or residential) in England and Wales from 1 April 2018 and to existing leases in England and Wales from April 2023, unless they fall within one of the exceptions* under the legislation.
The new minimum energy efficiency standards do not apply in Scotland although EPCs do exist in Scotland with some relatively minor differences in how they operate.
The Scottish Government now has the ability to introduce its own laws. Given their stance on leading Europe in terms of carbon reduction, it is unsurprising that Scotland has its own new regime, Section 63 Legislation, which has a broadly similar intent. If your SIPP or SSAS owns Scottish property, or if you are considering buying property in Scotland, you can find out more here.
Almost one in five commercial properties are currently in the lowest two EPAR bands. Since Barnett Waddingham alone has almost 4,000 commercial properties within our SIPPs and SSASs that suggests that the best part of 800 properties will be affected - unless action is taken.
Furthermore, many commercial properties will have been held as an asset of the pension scheme prior to October 2008, which means there is a strong likelihood that these buildings will not even possess a valid EPC (an EPC is valid for ten years from issue).
For an EPC to be valid it must be stored on the appropriate EPC Register for the property’s location and type. These registers can be searched using the property’s postcode so the easiest way to determine whether or not a valid EPC exists for your property is to check online:
EPCs themselves will help answer this question. They include a 'Recommendation Report', which provides an indication of opportunities that exist to improve the building’s energy efficiency. The recommendations are listed under four headings; 'short payback' (less than three years), 'medium payback' (between three and seven years), 'long payback' (more than seven years) and 'other recommendations'.
“It will soon be against the law to let out a property with an Energy Performance Asset Rating in the two lowest bands, F and G.”
For affected properties, these recommendations will outline what can be done, and the likely timescales and costs of carrying out the recommendations, in order for the property to then achieve an EPAR of at least an E.
Take, for example, a property which currently has an EPAR of G & 153. The benchmarks show A & 24 for a new building and C & 70 “…if typical of the existing stock”. Subject to the caveat, if all of the recommendations in the accompanying Recommendation Report were carried out, the EPAR would rise to a C, well within the required range. In some instances, things as simple as changing light bulbs to LEDs and fitting draft excluders can be sufficient to get up to an E.
A fortunate few may not need to do any fixing at all. There are instances where EPCs produced soon after they were first introduced were produced on an unduly pessimistic set of assumptions about the property. In such cases, a new EPC may produce a higher, fairer rating, lifting the property out of the danger zone.
In our role as trustee to SIPPs and SSASs, we are here to provide information and help to you.
The first thing is to ensure there is a valid EPC – something we would always want a copy of. If not, you should arrange for one, remembering that you may also need to allow time for work to the property before the changes take effect. We intend to offer a service to obtain a valid EPC through a suitable third party although you will continue to be able to make your own arrangements if you prefer.
Make sure, too, that you obtain quotes for any work needed, in order to factor the costs in to cash flow forecasting, and speak to us before actually carrying out the work.
It is worth taking a moment to review the property more holistically. It is possible, for instance, that the property has never been revalued, which may be a problem on a number of fronts. For instance, if its reinstatement value for insurance purposes is too low then, were disaster to strike the property, it could have an equally devastating effect on retirement plans.
It would also be sensible to review the commercial property insurance to check that this provides adequate cover and value for money. Using our experience in commercial property matters and our buying power, we have arranged a block insurance policy. Please contact your usual client manager if you would like further details and a quote.
A version of this article by Andy Leggett first appeared on LifeTalk
The requirement for a EPC rating of E (or better) will not apply to leases granted for a term of six months or less (providing that the granting of the tenancy does not mean the tenant will have occupied the property for more than 12 months), or any property let on a tenancy of more than 99 years.
The legislation includes safeguards designed to ensure that only appropriate and cost-effective improvements are required. Landlords may be eligible for an exemption from the requirement to reach the minimum EPC standard if they can evidence that one of the following applies:
If an exemption applies, a landlord will be able to let a property, even if its EPC rating is lower than E, but the exemption must be registered.