Three steps to energy efficient properties

This article was originally published by ESG Investor, click here to read.

Investor landlords who are led by ESG considerations will seek to implement initiatives across their portfolios to improve energy efficiency and reduce environmental impact. With regulations and certifications around building energy efficiency being continually updated, the incentive for investors and landlords to consider sustainable energy features is only increasing. In most cases, this will involve some sort of buy-in by their tenants, many of whom will have their own sustainability goals.

We outline below some of the more common initiatives being driven by landlords and tenants alike and raise some of the issues arising from them, namely electric vehicle (EV) charging point installations; photovoltaic (PV) cell installations; and net zero obligations as part of green leases.

Increasing demand for installing EV charging points

One of the key sustainability trends within ESG-led property investment is the installation of EV charging points (EVCPs). Following the UK government’s COP26 declaration that all new cars and vans must be 100% zero emission by 2035, there has been a paradigm shift, with an ever-increasing demand for electric vehicles. Research indicates that 20% of new car registrations in 2022 were electric vehicles, resulting in 27.5% of the total UK vehicle market being electrified in some way. Approximately one in seven new car sales in the UK in 2022 were electric, plug-in or hybrid. This trend has accelerated due to ‘clean air zones’ in major cities (such as London’s ULEZ) and the recent fuel crisis, pushing the need for more electric vehicles.

From July 2022 to October 2022 there has been an 8% increase in installation of EVCPs in the UK. As such, commercial landlords and their tenants are under increasing pressure to take up EVCPs to accommodate this trend. We explore below the various incentives and rationales behind tenants’ requests and landlords’ installation of EVCPs.

Incentives for commercial tenants – Retail stores are incentivised to install EVCPs on site to gain a competitive advantage, allowing customers to simultaneously shop and charge. This is especially appealing to customers where the retailer offers faster charging times than home chargers. Retailers further benefit from offering charging services as these increase footfall, dwell time and profits. A leading UK estate agent confirmed that installing EVCPs at a retail site resulted in a 50% increase in dwell time and more than doubled the average spend.

EVCPs are also attractive to retail businesses to improve their sustainability credentials by reducing their carbon footprint. This in turn improves their ESG performance and is likely to attract more business, sustainable investors, and new employees.

Commercial tenants providing office spaces are under increased pressure to provide EVCPs as employees and visitors increasingly expect charging facilities at work. Research indicates that 60% of EV drivers consider a charge point at the workplace as a ‘must have factor’ or ‘key factor of choice’.  With the increasing market-share of electric cars, businesses wishing to attract talent and investment are therefore looking to invest into EVCPs.

Large commercial logistics tenants will also be heavily investing in EVCPs. Due to fuel crises, logistics firms and fleet operators are likely to accelerate their depot electrification to become more cost effective and sustainable. Major retail outlets and depots will have increased installation of EVCPs to charge delivery vans overnight.

New legislation requiring EVCP infrastructure – The Building Regulation Part S, part of Schedule 1 for the Building Regulations 2010, came into force in June 2022 in the UK. This sets the following EV charging requirements for landlords of both new buildings and those undergoing major renovations.

Every new residential building with an associated parking space must install one EVCP.

All non-residential buildings undergoing a major renovation with more than 10 parking spaces must have a minimum of one charge point, along with cable routes for one in five spaces.

All new non-residential buildings with more than 10 parking spaces must have a minimum of one charge point and cable routes for one in five of the total number of spaces.

From 2025, existing non-residential buildings with more than 20 parking spaces will require a minimum of one charge point.

EVCP and infrastructure grants – Commercial tenants are further incentivised to install EVCPs due to the UK government’s Workplace Charging Scheme, available to businesses, charities and public sector organisations that meet the applicant and site eligibility criteria. This grant covers up to 75% of the total cost of purchase and installation, capped at £350 per socket with 40 sockets across all sites per applicant.

In addition, landlords also benefit from installing EVCPs through the UK government grants. The ‘EV Charge Point Grant’ gives landlords either £350 or 75% off the cost to buy and install a socket (whichever is lower), with landlords entitled to up to 200 grants for residential properties and 100 grants for commercial properties. In addition, the ‘EV Infrastructure Grant’ gives the landlord funds towards the wider building and installation works required to install multiple charge point sockets, with landlords entitled to up to £30,000 or 75% off the cost of work. Landlords are entitled up to 30 EV Infrastructure Grants each financial year. Each infrastructure grant must be used for a different property. Again, these grants will promote and accelerate the investment into EVCPs.

PV cell installations also on the rise

Solar power as “the cheapest form of electricity in history” at COP26. In the UK, the price of solar panel installation has reduced by 60% since 2010 according to the Department or Business, Energy and Industrial Strategy. Installing photovoltaic technology on land and buildings has presented itself as one of the more attractive methods for landowners and developers to save and generate energy and, in doing so, to meet their sustainability objectives.

New developments increasingly need to factor in renewable energy solutions and, of the options now available, solar power features heavily; it is relatively inexpensive to set up and gives landowners the opportunity to sell unused electricity back to the grid through feed-in tariffs. Tenants also welcome this technology as it allows them to reduce their utilities consumption and running costs.

It is also a valuable management tool for monitoring energy usage. PV cell technology is now sufficiently advanced to provide very specific data on the efficiency of each cell and whether the apparatus is running at full capacity or not. It is straightforward for landlords and their managing agents to pinpoint where maintenance or cleaning is required to bring the cells up to maximum efficiency.

In most cases, PV cell installations will be the responsibility of the landlord and maintenance costs can be run through the service charge for that particular building or estate, and the landlord will have control over the apparatus and the data it generates. However, the position might be quite different where a tenant has a lease over the whole of a site, such as a warehouse or distribution unit (which, with their large flat roofs, are well-suited to PV installations). Where it is the landlord who decides to install the equipment, the parties will need to consider who is to be responsible for maintaining it and upgrading it if necessary. And who should have the benefit of any energy not used by the tenant’s operations and who should receive any feed-in tariffs? Where the tenant decides to install the equipment, the parties will need to consider what happens to it at the end of the lease. Should the tenant remove it, or will the landlord want to retain it if it is still in good working order?

Green leases and the move to net zero

Landlords who themselves are led by ESG considerations will want to ensure their tenants are following suit and not using their premises in a way that would run counter to those considerations. The notion of the ‘green lease’ has been around for some years now, but has mutated somewhat in line with the ever-changing environmental landscape and the legislation that goes with it.

For most commercial leases, the key metric of energy performance has been the Minimum Energy Efficiency Standard (MEES) Regulations, by which premises are given a certificate showing the energy efficiency rating from A to G (A being the best). This makes sense as energy efficiency can be assessed easily at a reasonable cost, and is recorded in a publicly accessible register. But do the MEES Regulations go far enough for landlords with a strong sustainability agenda?

The concept of net zero leases has emerged as landlords want to exert greater control over the energy performance of their tenants. The overall aim of net zero targets is to achieve carbon neutrality so that the creation of greenhouse gas emissions is in balance with the greenhouse gas emissions removed from the atmosphere. More specifically, net zero can be defined as the reduction of greenhouse gas emissions overall and removing greenhouse gas emissions to achieve the Paris Agreement goals: these are enshrined in Articles 2.1 and 4.1 of the United Nations Framework Convention on Climate Change’s Paris Agreement, in particular limiting global temperature increase to 1.5 degrees Celsius above pre-industrial levels.

It has been well-publicised as part of the COP27 summit there will be ‘zero tolerance’ of attempts by organisations to greenwash their activity by adopting unrealistic net zero objectives and then failing to achieve carbon neutrality. The challenge for landlords who put their tenants under obligations to operate at net zero standards will be, in the first place, resistance from tenants to incurring extra expenditure on their premises and operations and then, if they fail to comply, how a landlord can monitor a tenant’s consumption data to establish whether there has been a breach. Net zero leases will need to be very clear on a landlord’s right to regularly request accurate data relating to utilities consumption and waste management at any given premises. Equally, tenants will want to limit the sharing of data to activity at that site, and to exclude their wider operations offsite and at other sites.

This article was co-authored by Monopoly Christiaan-Rakus, Associate, Commercial Property, at Farrer & Co.

© Farrer & Co LLP, November 2022