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Springtime brings raft of changes for commercial property lawyers
Published February 2008
Spring 2008 will be a busy time for commercial property lawyers across England and Wales.
Businesses have just weeks to ensure that they are fully compliant with new Government regulations requiring commercial properties to have Energy Performance Certificates (EPCs).
The clock is ticking down to April 6 when owners and landlords of commercial property in the United Kingdom will be required to instruct an energy assessor or inspector to survey the building, and issue a certificate of its energy performance.
With only weeks to go there is confusion in the marketplace that may result in disagreements between landlords and tenants.
And we believe that in the long term the new regulations will affect how properties are valued, with their certificated “green credentials” establishing new criteria.
EPCs will be required from April for all newly constructed commercial properties and also on the sale or letting of property over 10,000 sq m.
On July 1 more commercial property will require them and from October 1 they will be necessary for the sale or letting of all commercial property.
The original October 2007 deadline for EPCs was revised following concerns that there would not be enough inspectors.
EPCs record the energy efficiency and environmental impact of a building on a scale from A to G, with A being the most energy efficient and having the least impact through CO2 emissions.
Government concern over the environment, climate change, and the need for sustainability, has resulted in a raft of new legal and regulatory changes.
A lack of clarity in defining the new regulations could lead to confusion as to what constitutes a building and subsequent disagreement between landlord and tenant.
This could be a real issue in multi-let properties, for example shopping centres and office blocks and legal advice should be sought if a tenant in a multi-let building decides to sub-let or assigns its premises. It will have an effect on the whole of the building.
This could have consequences for landlords trying to recoup costs of surveys from their tenants who had no interest in the transaction triggering the EPC, or were on short term or contracted out leases.
Government predictions of the cost of a certificate being in the region of £1,790 may prove to be a significant underestimate for complex commercial premises. The price for an Energy Performance Certificate will be set by the market and not by the Government.
The solution to avoid disputes would lie in the clear drafting of agreements to establish the costs of obtaining an Energy Performance Certificate as a recoverable expenditure.
And there’s more to contend with in the Spring…
The Government has already acted to prevent property owners from deliberately vandalising their properties to try and avoid the new empty property rates charges,
The Rating (Empty Properties) Act 2007 comes into force on April 1. Its main effect is to reduce the exemption from empty property rates. Currently, most empty business properties receive 100 per cent relief for the first three months of vacancy and 50 per cent thereafter. Vacant industrial and listed buildings enjoy 100 per cent relief at all times.”
But from April there will be a three month rate free period for most non-industrial businesses and a six month rate free period for industrial properties – but then rates will have to be paid as if the buildings were fully occupied.
In an economy that is slowing there was some speculation that property owners might resort to vandalising their own properties to try and avoid having to pay, but the Government has laid down new anti-avoidance measures to prevent owners from deliberately vandalising their properties to a point where it is not economically reasonable to repair them, or by stripping them down to shell and core, so as to avoid rates liability.”
However, there is some good news for charities and community amateur sports club who have up till now been charged ten per cent of the usual rates bill, or a lesser figure at the local authority’s discretion.
From April 1, these properties will receive 100 per cent relief provided they continue to be occupied by a charity or community amateur sports club.
Small companies occupying premises with a rateable value below £2,200 will also continue to be exempt.
There is still some consultation on how some of the details are to be worked out, but nevertheless the new regime will begin on April 1 and it is essential that all business property owners understand how the changes affect them and that they are both budgeting for them and complying with them.
An ongoing issue for landlords and tenants is the revised Code for Leasing Business Premises which arose out of a desire to pre-empt Government imposed regulation upon the business sector and aims to promote efficiency and fairness between the parties. The Code (introduced in March 2007) is currently voluntary although it is intended to be strongly persuasive!
It is endorsed by Royal Institution of Chartered Surveyors (RICS), the British Property Federation (BPF) and the Law Society among various other influential bodies.
The Code comprises three parts, firstly the Landlord Code which sets out ten requirements that need to be met by landlords, secondly the Occupier Guide which contains 37 points of advice for tenants and thirdly, a set of model Heads of Terms.
The dedicated website for the new Code is www.leasingbusinesspremises.co.uk. The Heads of Terms can be downloaded and it is hoped that solicitors will encourage their clients to embrace the Code.
The Landlords Code covers ten topic areas:
Lease negotiations, rent deposits and guarantees, length of term, break clauses and renewal rights, rent review, assignment and sub-letting, service charges, repairs, alterations and changes of use, insurance and on-going management
The idea is for the recommendations made to be used as a checklist for negotiations as between the parties. The onus is on landlords to be transparent about any departures from the Code giving reasons for this.
The Occupier Guide purports to protect business tenants from unscrupulous landlords and provides the tenants with negotiation tips such as demanding from landlords amongst many other suggestions for example that interest on any deposit monies is accrued at a fair rate.
Some requirements may be less palatable for landlords, for example
- an authorised guarantee agreement should be required on the assignment only when the proposed assignee, when assessed together with any proposed guarantor, is of lower financial standing than the assignor who is resident or registered abroad.
- landlords should on request by tenants offer alternatives to their proposed option for rent review gauged on a risk adjusted basis;
- assignments on the whole should generally be allowed subject only to the landlord’s consent not being reasonably withheld;
- with a view to transparency in dealings, landlords should state whether alternative lease terms are available and must propose rents for different lease terms.
Currently it seems that institutional landlords have been more readily embracing the Code, which is not surprising as the Code is a result of a pan-industry impetus principally between Government, institutional landlords and tenants and other influential bodies.
Government monitoring of the acceptance of the Code is an on-going process and it will be interesting to see how the market at large embraces the Code, which may be viewed by many in the industry and particularly landlords as further Government proliferation of what otherwise should be a free market economy.
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