Urgent Government action is being demanded to avoid the risk of millions of pounds being wiped off the value of commercial property portfolios if owners and occupiers fail to grasp the full implications of the Energy Act.

With many question marks surrounding the Act, is it time for the Coalition to issue a five-year warning to encourage companies to start taking action?

Director in our Corporate Advisory Services team, Nigel Oliver says: "Owners and occupiers of commercial property risk paying a very heavy price if they do not act on the Energy Act now."

Energy Act is core to the Coalition's climate change programme

The Energy Act will change the economics of sustainability in the UK. It is the central pillar of the Coalition’s programme relating to energy and climate change, focuses on improving the energy efficiency of buildings and includes three major elements in the Green Deal, Energy Company Obligation and Private Rented Sector regulation.

Major implications for up to 20% of commercial stock

On 1 April 2018, it will be unlawful to let a UK commercial property with an Energy Performance Certificate (EPC) rating of F or G. The Energy Act therefore presents considerable risks and challenges to lenders, landlords and occupiers, with many properties potentially becoming impossible to let or occupy and heavily reduced in value, said Nigel.

He added: “As much as 20 per cent of commercial stock could be affected. The implications of the Act are huge. There are still so many questions. It requires a great deal of financial analysis, weighing up values and looking at the various options. It will bring forward many refurbishments and redevelopments of buildings that are already teetering on the brink.

“Rent reviews and lease renewals will be affected. Properties with an F and G rating will become less desirable so should that be taken into account now? Should there be reduced rates assessments? All of this flows from the impact upon values that this legislation may have.

Government needs to take action

“The Government needs to clarify the implications of the Act and what support may come forward in the shape of a revised Green Deal for businesses. Five years may sound like a long time but in commercial property terms it isn’t. People need to think ahead and take action now. As the clock ticks down to 2018 we may see millions of pounds being wiped off the value of portfolios if owners and occupiers fail to make improvements in order to comply with the new legislation.”

The impact:

Lenders must

• Understand the risks within your current loan portfolio
• Consider EPC ratings when lending on properties – along with the impact on loan repayments

Landlords must

• Understand the potential impact on value and return within their portfolios
• Understand where the cost (and potential recoverability) of complying with the Energy Act lie
• Asset manage their properties to mitigate the impact of the Energy Act over the period to April 2018

Occupiers must

• Be aware of unforeseen costs associated with raising the EPC rating of a property that might be passed on to them by the Landlord
• Understand whether the Energy Act will restrict their ability to sublet the building in future years therefore reducing their flexibility to respond to business needs