The rules surrounding letting and selling buildings are clear, you need a valid EPC for signing the legal documentation for sale or lease and for properties being let the property must achieve a minimum E rating for compliance with the MEES regulations.
With Shell and Core Buildings, this is not always possible or practical.
There are two types of situations where there is a problem providing EPCs:
- New Build Shell and Core
- Existing Buildings stripped back to a shell with NO services.
New Build Shell and Core
There is a lack of understanding of the requirements for when an EPC should be lodged.
While an EPC may not be required to be lodged for building regulations approval on a shell and core New build, it is for the legal marketing and subsequent letting or sale of that property. A draft EPC is in effect the same calculation as the BRUKL document for Building Control approval.
The EPC is a legal document provided to any prospective tenant or purchaser and has been governed by the Energy Performance of Buildings Regulations since 2009, but even in 2022, transactions are still taking place without a lodged EPC in place.
For a new building, the developer needs to produce a Draft EPC with their BRUKL report for Part L building control compliance, however the developer does not need to lodge this EPC. They will generally only produce a draft EPC as they have made assumptions about what heating and lighting is to be installed, in order to pass building control part L. This is because the tenant or purchaser will be responsible for a fit out to suit their needs.
What may then be subsequently installed by the tenant or purchase may be materially different to the equipment assumed for the EPC/BRUKL. This equipment may be materially worse than the theoretical equipment used to create the BRUKL report and Pass Part L of the Building Regs. But the Lease still needs to be assigned before the tenant can do a fit out, which requires a lodged EPC!
There isn’t clear guidance on what to do in this chicken and egg scenario.
In practice some lawyers allow leases to be assigned based on the developer’s draft EPC in this scenario. This is on the understanding that the tenant will perform a first fit out. The tenant then does a first fit out and a lodged EPC should then be produced. There is no guarantee the tenants fit out and subsequent EPC are as good as the landlords/developers draft EPC.
What happens if there is a green clause in the lease stipulating that the tenant cannot make the EPC rating worse than the draft EPC already existing?
Ideally tenants should be given the details of the HVAC on which the draft EPC was created and any deviation from this spec should be assessed for compliance with the terms of the lease.
I.E. The tenant needs to have the building modelled with their proposed kit installed to ensure compliance with the lease.
For the tenant the best thing to do is to instruct an EPC review before signing a lease with a green clause. This ensures all the relevant documentation used for building control compliance is provided by the developer and allows the tenant to maximise the EPC rating during their fit out,or at worst not make the EPC worse.
Unfortunately in many cases the developer disappears with all this information upon completion, Default inputs have to be used regarding the buildings thermal performance when the assessor doesn’t have any of the original documentation to prove otherwise.
For context at SEA Consulting we surveyed a full finished new development which was going to achieve an A rating for building control, however when using default values for the thermal performance (i.e. worst allowed under part L) the EPC came out a C rating.
If we hadn’t carried out the EPC review, and identified this issue in advance, the tenant would have been forced to carry out new surveys on the building such as an air pressure test, along with installing more expensive and unnecessary equipment at first fit out, including additional renewables, to ensure the EPC achieved an A rating.
This is also true when the developer sells the property to a new landlord, we have worked with many landlords who were not provided anything from the developer, only to discover their property rating has dropped significantly when they renew the EPC 10 years later. As Net Zero and Building emissions are now so significant, this one scenario should be chilling to landlords. If your building suddenly drops one or even two ratings, it is now worth less or may be unfinanceable or harder to let as tenants seek to ensure their own green credentials.
In summary no equipment should be installed without reviewing the consequences to the EPC, whether Landlord, Tenant or Purchaser its in all parties interests to work through this issue collaboratively.
Existing Buildings That Have Been Stripped Back to a Shell
With the way the rules are currently written, it is best practice for landlords to get an EPC done before stripping back a property so there is a valid EPC in place before signing the lease.
Why? Because if the property is stripped back to a bare shell with no lighting, hot water system or heating system the rules stipulate that basic default values must be used to create the EPC. These are always worse than even if relatively poor kit was previously used.
Lighting has to be assumed as tungsten bulbs. Seen one recently? No? Nor us.
Yet in a commercial space lighting efficiencies have a critical bearing on an EPC rating, next time you’re in a shop, look up and see how much lighting is used, even in the daytime. If the lighting assumed in the EPC is basically 1870s technology you can see why this matters. F and G ratings await.
Before properties are about to be stripped, we strongly always advise to leave a single low energy light in each room, so the assessor has something for their assessment other than Thomas Eddison’s bright idea.
At SEA Consulting we have been asked numerous times to survey a stripped property as the EPC has expired. Unfortunately when the EPC rating comes back with an F or G rating the lease can not be signed.
Again, some lawyers will allow the lease to be signed based on a predicted EPC using the tenants proposed fit out, assuming that an E or better is achieved. This is not always the case though, as it is technically not allowed in the EPC regulations. Where a lawyer insists on a legal EPC, it forces the landlord to add some low energy lighting to each room in the property or add other measures to bring the rating up to a minimum E rating.
Other Reasons to Review The EPC before you sign;
If your landlord presents you with an EPC and a lease with a clause that states you are responsible for MEES Compliance both as it stands and if it changes, do you know what looks like financially?
Did you know that there are valid EPCs using a different methodology than used today that will automatically mean when re-surveyed the building will drop at least one rating, if not two?
Did you know that there are bad assessors producing EPCs that are skewed to give the landlord a better rating than the building warrants?
In all these scenarios you could be liable for a serious and unexpected financial cap- ex commitment, with higher than expected running costs and higher than planned maintenance costs over the term of your lease.
That C rated building may be an F or G, we have seen plenty of examples where this is the case.
Contact us as part of your due diligence and don’t get suckered in to a financial trap, we can provide a comprehensive assessment of the EPC and Installed Services. Negotiate from a position of strength and be aware of the financial implications before you commit.
At SEA Consulting we have been helping our clients with this for years and help saved them hundreds of thousands of pounds in unnecessary costs and stopped them being liable for potential long term ramifications.