Climate change and its impact on the office market – Real estate and construction


Worldwide: Climate change and its impact on the office market

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Expanses of forest fires in Siberia, Africa, North America and southern Europe. Landslides in Japan. Intense tropical storms in Florida and Haiti. Deadly floods in Germany and Turkey. These are just a few of the extreme weather events of 2021 that scientists believe have been caused by global climate change. As a result, there has been a call to arms around the world demanding that governments start heeding extreme climate change and introduce drastic policies before it’s too late.

Plans are currently in place for the UK to achieve a ‘net zero’ emissions target by 2050. As part of this target, a government consultation document was published in March this year entitled ‘ Implementation of future EPC B objective”. Under this new proposal by 2030, only commercial buildings rated A or B can be let, while commercial properties must have achieved a provisional rating of C by 2027. The government considers these commercially let offices as a huge challenge to achieve ‘Net Zero’ as they emit a third of all emissions from buildings in the UK.1

Necessary alterations to many retail premises could cost a business dearly, rendering many offices unusable, particularly in London where two-thirds of commercial premises are currently rated D to G according to the Financial Times.2.

The regulations relating to minimum energy efficiency standards (MEES) also raise concerns. Current regulations state that a landlord can enter a premises to make energy efficiency improvements, but only if the tenant authorizes the landlord to do so. In this case, the Lessee is liable for the charges because it is he who benefits from the energy improvements.

However, if the tenant were to refuse, the landlord may be able to claim an exception under MEES regulations, if the landlord can prove that the tenant is refusing consent, to avoid paying what the landlord would have to pay for the improvements at the end of the lease if they wished to re-let. In this case, with the introduction of ‘future EPC B objective’, if a landlord were to obtain an exemption, it would be legal under MEES regulations for the landlord to continue to rent the property even if it is not not reach B rating. EPC standard.

One thing is certain, and that is that in the years leading up to the 2030 compliance mark, these proposals will reveal which companies and businesses are actually committed to their own carbon reduction targets.

  • Will the businesses that are tenants in these commercial offices be willing to pay the landlords for these changes or will they continue to be a stumbling block to MEES regulations and allow the offices to continue to be leased as an exemption from the new EPC rules?

  • If tenants are willing to pay for the improvements, however, will that lead to a reduction in market rent?

It will become increasingly important for businesses to understand how climate change will affect their business. Owners, investors and lenders must act quickly to improve their properties. While cooperation between landlord and tenants is going to be a crucial element, as we want to reduce our ecological impact as a society while allowing companies to continue to work and operate in their current office spaces.

Footnotes

1. Government unveils new net zero support for buildings and ‘every mode of transport’ (edie.net)

2. Office efficiency rules threaten to hit London commercial property market | Financial Times (ft.com)

Originally published November 25, 2021

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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