EPC and office obsolescence: How landlords can reduce risk

Despite the complex regulatory landscape around the energy performance of commercial buildings, office landlords have a valuable opportunity to proactively assess the need for upgrade work.

While there is uncertainty about the timetable for changes to minimum energy efficiency standards (MEES), this period can be effectively utilized.

It is likely a matter of ‘when’ rather than ‘if’ the minimum energy performance certificate (EPC) ratings rise, so starting asset reviews now will facilitate any necessary upgrade work and help mitigate future risks of obsolescence.

Moreover, there are numerous additional benefits such as operational costs reduction, compliance and risk management, and tenant attraction and retention to name a few.

Since the Government proposed restricting office leasing in buildings that don’t meet minimum EPC standards, as part of the pathway to achieving the 2050 net zero target, several developments have already taken place.

How to overcome office EPC timetable confusion

The most recent was in September 2023. The original plan was that from 2025, landlords would have to have a minimum EPC C rating for their building in order to issue a new lease. It rises to EPC B in 2030. 

But then it was announced that the 2025 target was being scrapped for residential with a proposed new date of 2027. There was no mention of whether this similarly applied to commercial buildings which has created confusion. 

“With a general election coming up, there is an expectation that the winning party might reintroduce the original targets. It’s more uncertainty for office landlords when the industry needs clarity and stability,” says Georgina Johnson, Senior Building Surveyor.

Given the ultimate direction of travel, planning can help spread and even reduce upgrade costs and minimise a number of risks for landlords.

Roughly 90% of current office stock in the UK falls below the target rating of EPC B. That’s a large number of buildings that will need to be improved to remain lettable as offices.

Market pressures to upgrade offices

There are also market pressures. The occupier, investor and funding landscape is increasingly focused on buildings' energy performance.  
Businesses are increasingly looking for greener, more energy-efficient offices as part of their carbon reduction programme and to keep bills down. Demand for poorly performing offices is unlikely to improve.

It creates an opportunity for office landlords. “Tenants are looking for high-performing space and using EPCs to support decision making,” says Tom Roundell Greene, Head of Sustainability.  

“High-rated buildings are more desirable, with the potential for landlords to secure an improved rent and make operational savings from reduced energy usage.” 

Banks and lenders are similarly looking at the sustainability credentials for assets on their loan books. 

It poses a risk to lenders if a landlord can’t rent their building in a few years because of changes to the minimum EPC rating. Lenders increasingly request information on EPC and energy efficiency in valuation reports. 

“The RICS has issued a lot of guidance about incorporating ESG generally into the valuation process and what should be considered,” says Roundell Greene.

“So as an indicator of the future direction of travel, it suggests that this will play a more formalised role in the standard valuation process.” 

What are the financing risks for office landlords?

The risk for landlords is fewer funding and financing options for poorly performing buildings without improvements and upgrades planned.
There is a positive angle to this story. The focus on sustainable real estate means an increasing range of green financing products and the potential for preferential lending rates for upgrade work to improve energy performance. 

Grants for improvement works may also be available. The central and local government funding landscape is complex and challenging to navigate, but it may be worth getting advice.

Landlords can also work with their tenants on improvements. Mutually beneficial partnerships can help share the cost of refurbishment work, leading to improved energy performance. These can be supported by green leases which incorporate sustainability practices and responsibilities for both landlords and tenants to create mutually beneficial outcomes.

Another step to consider is getting EPC ratings re-evaluated, as the weighting within the assessment has changed. 

“Certain types of heating, for example, were previously rated poorly but are now favoured, so it might benefit your overall rating to get it redone,” says Johnson.

Good EPC assessments to mitigate risks

It’s also important to make sure the assessor has as much information as possible to avoid assumptions being made.

“A good quality report will inform your decision-making; you can get value out of the process rather than it just being a piece of paper you need to be compliant,” says Roundell Greene.

Taking steps now makes it easier to mitigate risk and plan upgrade work. 

“Use this time of uncertainty wisely to get advice on what potential work is needed, how much it will cost, and to plan the programme of work,” says Johnson.

How Carter Jonas can help

Carter Jonas can help you unlock the potential to drive down the carbon emissions associated with your built assets, moving you closer to delivering on your organisation’s net zero goals. 

Our building surveyors possess extensive expertise in construction delivery, refurbishment, and maintenance, complemented by a thorough understanding of current legislation and upcoming changes. We are well placed to advise on ESG and can help you implement sustainability measures in your space to improve efficiency, reduce operating costs and support occupier wellbeing.

Get in touch with one of our experts today to discuss your requirements.