Whilst we are working hard to raise the energy efficiency standards of existing buildings, there is one recurring theme that keeps knocking us back. Strip-back lease terms.

Take for example the recent case of a 2012 built portal frame building which has been partially stripped ready for the next tenant. Heating and hot water remain, but lighting has been stripped out so the next tenant will have to install all new lighting. 

It really is pretty ridiculous when you think about it. The building had a 2012 or later fit out so the lighting will have been energy efficient. Because of an archaic strip-back lease term, that modern energy efficient lighting has been stripped out and sent to landfill; with the associated cost, environmental impact and loss of the embedded carbon already invested in that lighting installation.

The incoming tenant is going to have to install new lighting, which will hopefully be a bit better than what was taken out, but probably not by that much and probably not by enough to offset the cost and carbon wasted in the rip out and replace process. It is difficult to justify this procedure and yet we see it time and again in commercial buildings. 

Now the landlord wants an EPC and the assessor is under pressure to provide a good rating. But the assessor can’t do that because the EPC conventions require us to assess it on the basis that it does not have energy efficient lighting. The argument is often made that we should assess based on energy efficient lighting because that is what will be installed, but that doesn’t really stand up. The EPC is an assessment of the intrinsic energy efficiency of the building as it stands on the day of assessment. If energy efficient lighting needs to be installed then by definition the building as it is being offered for sale or rental does not have energy efficient lighting.

So, is it wrong to be giving the building a lower rating because the landlord has had energy efficiency ripped out and left an incoming tenant needing to invest in recreating it? This is throwaway society on an industrial scale. If we can prevent it by persuading landlords to keep appropriate energy efficiency improvements their tenants make rather than sending them to landfill every time there is a change of tenant, that has to be good for the environment, good for the incoming tenant and good for the value of their asset.

Many progressive landlords no longer put themselves into this position of downgrading the efficiency rating of their own buildings and have altered their lease terms to prevent it. By working with tenants to agree alterations that improve the energy efficiency of the building in ways that can be carried forward to future tenants, these landlords are developing their asset and increasing its value over time, largely paid for by the tenants.

It is acknowledged that there will be times when an incoming tenant will need a completely different fit out than the outgoing tenant had. The sensible thing is to have an approach that addresses that in the minority of situations when it arises. It is not sensible to throw away what would in most cases be useful just because in a few cases it will not be. 

Landlords do have plenty of opportunity to avoid getting into this situation of having a low rated EPC issued for a stripped back building.

1) As above, keep what is there rather than binning it. (Your tenant has invested their money in upgrading your building – take the win).

2) Get an EPC when the tenant gives notice before any strip back.

3) Ensure every zone has at least minimal lighting (and potentially other services) retained, even if more occupier specific lighting has to come out. That means the building is at least usable prior to any re-fit and means we can assess on the basis of the lighting type (and other services) present.

Only if a landlord chooses to do none of these does the building get a downgraded EPC rating. If it does still happen it is not the fault of the EPC assessor, nor is it the assessor’s job to find a way around it. The assessor’s job is to rate the building as it stands on the day they are sent in to assess it. 

There may be a case for sympathy for a small independent landlord who lacks much experience of changes of tenant. A portfolio landlord should only really be still getting into this position if they have spent the last 15 years treating EPCs and enhancing the energy efficiency of their buildings as irrelevant. A problem rating because they are offering a property to market with no lighting instead of energy efficient lighting is arguably a really good wake-up call.

For the landlord who is in this position of having a poor EPC rating because they have had the assessment done at a point after (probably energy efficient) services have been removed and before new (should be energy efficient) services are installed, what are the options?

1) To do the fit out first, making it suitable for the intended client type and get a good EPC rating.

2) Market with a poor EPC rating (must be E or above) and when a tenant moves in do nothing more.

3) Market with a poor EPC rating (must be E or above) and when a tenant moves in, ensure the fit out is appropriate and get an updated EPC to demonstrate the asset then has a good rating (and therefore higher perceived value to future tenants and to lenders). 

4) Market with a poor EPC rating (can be F or G) and when a tenant is found enter into an agreement to lease (or similar) subject to fit out to satisfactory standards. The lease can then commence once the fit out has been done and an EPC has been lodged with an E or above rating.

The underlying message here is that a building's energy efficiency should improve over time, not be dragged back down to the baseline every time there is a change of tenant. Driving down the environmental impact of our building stock really needs the commercial property sector to adapt to this new reality.

Ian Sturt, Proficiency Chairman
4/3/2023