New Energy Performance of Buildings Regulations – What’s Around the Corner for the Hotel & Hospitality Industry in England and Wales?
Written By
Associate
UK
I am an associate in the real estate team. I advise on the acquisition, disposal and development of land for hotel, office, residential, logistics and industrial use. I specialise in the energy sector with a focus on nuclear power.
The Energy Performance of Buildings Regime is not new. When it was introduced seventeen years ago, it was simply about data sharing on energy efficiency. It required an icon in the corner of a property advert in an auction catalogue or estate agent window. The little icon was bright and colourful but few paid attention. Six years ago, a minimum energy standard of E was imposed for commercial buildings let to a new occupier including restaurants and hotels. Eighteen months ago, that minimum standard was extended to all commercially let buildings, regardless as to when and to whom they were let.
For owners of older buildings, the previous Conservative government introduced a roadmap to gradually tighten energy efficiency standards. By 2025, the minimum standard will rise from an E rating to a C rating, followed by an increase to a B rating in 2028. In each case there would be a two-year grace period for previously let buildings. This represents a slowly tightening grip over the industry. If an E rating is akin to a weak handshake, a C rating is a memorable clutch. A minimum B rating is a finger-crushing hold.
With the recent election of the new Labour government, a question hangs over whether that roadmap will be adhered to. Out of all commercial building EPCs lodged in the previous year, 40% fall short of a B rating and 25% fail to achieve a C.1 Owners of ageing building stock are lobbying ministers to drop the proposals so that towns and cities are not left with swathes of unlettable space. The Government has pledged to stick to the roadmap with regard to domestic property. But it has so far stayed quiet on its approach to commercial buildings. With 2025 around the corner, some relaxation on compliance dates is looking more than likely. However, the country’s 2050 net zero pledge is ringing loud in ministers’ ears. The built environment is responsible for a quarter of the country’s carbon emissions, and according to the U.K. Green Building Council, 80% of the buildings that will be occupied in 2050 have already been built. The new government knows it cannot de-carbonise solely by making our new homes and commercial buildings sustainable and snazzy.
What do tightening EPB regulations mean for a business in the hotel and hospitality industry? That depends on the holding structure of your property and who your investors are. Fines of up to £150,000 are looming on the horizon for building owners who are not prepared for tightening standards. Falling into non-compliance brings with it the prospect of being named and shamed by regulators. For the most unfortunate, it could mean default under loan agreements. Breach of hotel operating agreements and franchise agreements would be the outcome for others.
In addition to tightening standards, there is also an uptick in enforcement on the horizon. Enforcement has been admittedly lacklustre to date. In years gone by, enforcement authorities could not be sure that they were looking at a sub-standard property solely by looking at an EPC because one of a number of exemptions might apply in the background. That is set to change as it’s now compulsory for most exemptions to be registered.
On the plus side for the industry, there are several misconceptions circulating about tightening minimum standards. Firstly, businesses should note that the key offence, regulation 27 of the 2015 regulations, is a prohibition on letting or continuing to let a substandard property. It does not penalise a tenant for occupying a poorly insulated restaurant or a draughty hotel. Nor does it capture an owner-occupier. Whether it captures an operator under a HMA model, or a franchise is a fact specific question, although many using these models will fall outside the regime.
There is an ever-decreasing pool of buildings legitimately off the EPC register. Some hotels fall into this category because they were let under reasonably long occupational leases twenty years ago. The owners of these hotels might do better to remain off-grid. Other businesses will get respite under the rules about when an EPC trigger date occurs. A trigger date under the regulations is not necessarily the same as an increase in minimum standard. Finally, there are a host of exemptions that could benefit real estate and hospitality businesses that are subject to the regulations. Those exemptions are complex and, like the rules themselves, they are spread out over several statutory instruments. They include a seven-year capital payback test, an exception over denied consent to works, and an exception relating to certain listed building features.
We hope that by dispelling some of these misconceptions, we can help hoteliers and F&B operators sleep better at night. However, owners, lessors, and users of hospitality spaces should still keep an ear to the ground. We are advising clients to act sooner rather than later to take advice specific to the buildings they own and have under management. Where contracts negotiated now do not pre-empt the roadmap ahead, it may be too late by the time the legislator’s grip tightens.
