On 23 February 2017 the Government published new guidance on how to comply with the Energy Efficiency Regulations 2015, the legislation enacting the requirement for commercial buildings to meet minimum energy efficiency standards (MEES) outlined in the Energy Act 2011.

This guidance will hopefully serve to end the ‘will it, won’t it’ happen discussions that have been commonplace in the industry over the past six years and provides greater clarity over the key obligations for owners of commercial property.  With just over a year to go until the Regulations come into force we anticipate increased activity among property owners to prepare themselves for compliance.

The key points in the guidance are as follows:

  1. The Regulations will, as anticipated, be targeting F & G rated buildings/building units being marketed for sale or lease from April 2018;
  2. Enforcement will be managed by local weights and measures authorities with penalties of up to £50,000 for breaches corrected within three months, and up to £150,000 for breaches over three months.  All breaches will be public record for a minimum of 12 months;
  3. If there is only a building level EPC available this may be used for demised areas of the building; however, if there are EPCs covering demised space as well as a building level EPC the certificate for the demised space must be used;
  4. Listed building status is NOT an automatic exemption.  If there is already an EPC registered for a listed property, it’s obligated.  For other listed properties exemption is granted on proof that modifications will alter the character or appearance of the property;
  5. Leases >99 years, or <6 months are exempt unless, in the latter case, the tenant has been in occupation for more than 12 months already;
  6. The Regulations will apply to ongoing tenancies from 2023 where the EPC remains valid (i.e. if the EPC expires during a tenancy there is no need to renew until the next lease/sale event);
  7. For F and G rated buildings all improvements that pay back within seven years must be implemented.  Exemptions will only be granted on provision of three separate quotes covering capital + installation demonstrating payback beyond seven years;
  8. Exemptions will also be granted for F and G rated buildings who can demonstrate all practicable energy efficiency measures have been implemented.  This exemption lasts for five years at which time evidence must be re-submitted that no further improvements can be made;
  9. Buildings might also be exempt if a report from a RICS registered surveyor confirms that the implementation of energy efficiency measures will reduce the value of a property by more than 5%;

In simple terms all energy efficiency measures must be implemented at F and G rated buildings that pay back within seven years.  E rated and unrated buildings are both risks as building regulations tighten and the E rating becomes harder to achieve.

For more information about how M J Mapp can support you in meeting your compliance obligations, please get in touch with us through your existing contact, or by calling 020 7908 5500 or emailing carl.brooks@mjmapp.com

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Rumours of the death of shopping centres as retail migrates online have proved exaggerated

John Michell, Head of Retail, contributed to the full article in the January edition of ‘Shopping Centre’ magazine. See right for a downloadable copy.

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What is it?

ESOS is an energy audit scheme with mandatory participation for qualifying businesses classified as being ‘large enterprises’. The criteria for qualification are that the enterprise has:

1. at least 250 employees, or

2. a turnover of at least €50m AND a balance sheet of at least €43m on 31 December 2014.

An overseas based corporate group with a UK undertaking that meets the above criteria will be required to comply with the scheme.

In the UK ESOS targets the highest parent organisation but allows for disaggregation.

It is likely that many Real Estate entities will be required to comply with the scheme.

What do participants need to do?

Participants in the scheme must:

1. Notify the scheme administrator of their participation;
2. Measure their energy use;
3. Identify energy efficiency and energy management opportunities;
4. Evaluate these opportunities; and
5. Store information and data in an evidence pack.

Evidence of compliance can be demonstrated by the production of:

1. Certification to ISO 50001
2. A current Display Energy Certificates and associated recommendations
3. A completed Green Deal Assessment (although there is currently no non-domestic scheme available)
4. An ESOS compliant energy assessment conducted by a qualified in-house or external assessor

There is no obligation for participants to implement any of the identified opportunities for energy saving, and no requirement for further disclosure of audit findings, in company reports for example.

100% of energy consumption must be measured by usage or spend but only 90%, by usage, needs to be audited.  As transport emissions are included in the scheme this may allow for these emissions, which may be difficult to quantify, to be excluded.  Unconsumed supply may also be excluded where a reasonable methodology for its estimation can be applied.

When does it need to be done by?

ESOS operates on a 4 year cycle.  For the first cycle, notification of participation and compliance must be made to the Environment Agency by the 5 December 2015.  Energy audits conducted by participants from 6 December 2011 to 5 December 2015 are admissible as evidence of compliance.

What are the penalties for non-compliance?

Civil penalties apply for non-compliance with ESOS requirements ranging from £5,000 to £90,000 depending on the offence.  The Environment Agency is committed to a collaborative approach to compliance and will use discretion in applying any penalties.

How can M J Mapp help?

ESOS requires additional resource to ensure compliance, however, there are clear opportunities to be realised from identifying energy efficiency and energy management improvements, not just from buildings but from transport use for company business.

In many cases M J Mapp, through our property management activities, are collating the necessary data at the property and fund levels, and obtaining admissible reports for evidence packs required by other statutory regimes (TM44, for example).  As part of our approach to property management we also conduct periodic energy audits to identify efficiency improvements for further discussion.

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A landmark decision was made last week in the Court of Appeal changing the law of how rent should be paid when a company goes into Administration

In 2008 a High Court decision declared that rent must be paid as an administration expense, as prior to this the Administrators could decide if they wanted to pay rent or not. Under this 2008 decision it emerged that rent was only payable if rent was actually due for payment while the company in Administration was using the property. Companies in Administration found that they could trade from a property rent free for up to three months simply by entering Administration the day after the quarter day when the rent was due. This resulted in landlords receiving no rent until the next quarter day.

Companies in Administration who used the property on the quarter day were liable to pay the full quarters rent as an expense of the Administration, even if they ceased using the property the following day. The position was unfair for both landlords and tenants.

GAME Group went into Administration on 26 March 2012 – one day after the March quarter day. They traded from a number of stores and did not pay any rent for the March to June quarter. Several landlords asked the Court of Appeal to overturn the previous High Court decision and the landlords wanted to replace the existing law with a more common sense approach by getting the Administrator to pay rent each day the company in Administration used the property.

The Court of Appeal has now decided that companies in Administration will have to pay rent for the days they are in occupation. Pay as you go!

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The 3rd Edition of the RICS Service Charge Code is scheduled to be published in February 2014

The code is not yet in a completed form and has been subject to much comment by M J Mapp and a number of the larger managing agents who have had and retain a number of concerns.

We do expect there to be some further changes, largely because the consensus view is that the revised version places significant additional obligations on owners and very few on occupiers.

Whilst The Code is very much an extension of previous versions and remains a non mandatory document we thought it would be useful to highlight a few key areas in advance of its publication.

  • Recoverability under short term leases and sinking funds

The Code recognises that leases are now much shorter and the problems this can cause when considering the need for significant repairs or replacement. The Code will place a greater emphasis on the use of sinking funds as a way of spreading costs.

As drafted The Code goes as far as suggesting, as an example, that an occupier with a lease of 5 years or less may only be considered to have a transitory interest and should not be asked to pay in full for the replacement of a boiler whose life expectancy would be considered far longer.

Although sinking funds have been considered unfashionable and difficult to administer for some time, it is clearly something that should be considered carefully when drafting any new leases, as recoverability under shorter leases for major plant replacement may become more difficult.

  • Procurement

The Code confirms that a managing agent may use a procurement specialist (in practice this is almost always an in house specialist) to procure services and to help deliver greater value for money. The Code further recognises the work, processes and costs involved and makes clear that the cost of procurement is now a recognised and appropriate service charge cost. Various occupier-focused bodies have added their approval to this approach.

This change will result in procurement being a separately stated cost within service charge budgets, as opposed to being wrapped up within overall contract sums. We sense that the overall net cost should remain largely the same and are pleased to see a move to ever greater levels of transparency in this area.

  • Carbon Reduction Commitment Energy Efficiency Scheme

The Code recognises the dilemma surrounding who should pay for CRC charges and states that a fair and reasonable approach should be taken to the apportionment. It goes on to state that owners should be able to recover the full cost of providing bona fide services to occupiers and occupiers should be in no worse position than if they had occupied on a full repairing and insuring lease, although with the emphasis that the “polluter should pay”.

In addition there are a number of other more minor (and good) amendments around the standardisation of coding and certification and earlier suggestions that audits should be significantly more extensive are no longer being voiced.

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Environmental metrics go mainstream

The Companies Act 2006 (Strategic and Directors Reports) Regulations 2013 came into force on 1st October 2013 obligating quoted* companies who are UK incorporated. Requirements must be met for, and included as part of, annual reports and accounts ending on or after 30th September 2013.

New regulations are:

  • Report their scope 1 and 2 greenhouse gas (GHG) emissions** represented as tCO2e that are under the company’s control in their directors’ report; and,
  • Consider environmental risks and opportunities ensuring that environmental issues are factored into long-term business decision making.

These requirements must be met for, and included as part of, annual reports and accounts ending on or after 30th September 2013. The current regulations only apply to around 1,100 listed companies but there are plans in place to look at extending them in 2016 to all large companies. This could significantly increase the impact of the regulations and affect as many as 24,000 businesses.

There is no prescribed methodology to follow to ensure compliance but to ensure transparency it is essential to use an established methodology such as the GHG Protocol or ISO14064. It must be ensured that reporting covers emissions from all activities for which the company is responsible for globally and that data for all relevant GHGs are included. The first reporting year requires data for the preceding 12 months only but subsequent reports must include previous years’ data.

In order to ensure readiness for compliance, organisations are encouraged to identify whether they will be required to comply. Once agreed their reporting boundary needs to be established, this is likely to be the same as the boundary used for financial reporting but this should be checked. It must not be assumed that the same data used in other compliance schemes such as the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) is sufficient to ensure compliance with GHG reporting. The latter requires additional information (if applicable) relating, for example to losses of refrigerant and propellant gases (HFCs and PFCs) and combustion of fuel in owned vehicles, equipment or machinery.

It is intended that, through compliance, businesses take a more active approach to carbon management and reduction as the Government looks to progress toward the national targets set out in the Climate Change Act. It is hoped that, through compliance, businesses begin to see the economic benefits of managing and reducing carbon emissions, and understand the risk that exists around failure to effectively manage environmental performance.

M J Mapp can assist obligated clients by compiling data required by the Regulations in the preferred format. Most data is held in a central database dedicated to improving transparency and availability of environmental metrics. The system is flexible and data collection can be tailored to individual client needs. At this stage there are no plans for financial penalties or taxes as with CRC, however, if GHG emissions relate to central plant used by occupiers in multi-let premises M J Mapp can attribute data to each area to enable any costs relating to these emissions to be passed on if required, should leases allow.

Further details of the requirements of these regulations can be obtained from M J Mapp, or from the government guidance note that can be found here***.

* Whose equity share capital is listed on the main market of the London Stock Exchange; in a European Economic Area; or on either the New York Stock Exchange or NASDAQ.

** As defined by the GHG Protocol, scope 1 emissions are all direct GHG emissions owned or controlled by the company including combustion of fuel, machinery or manufacturing processes. Scope 2 emissions are indirect GHG emissions from consumption of purchased electricity, heat or steam.

***https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206392/pb13944-env-reporting-guidance.pdf

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Commercial Rent Arrears Recovery (‘CRAR’) is planned to be implemented in April 2014

Commercial Rent Arrears Recovery – A new statutory process that will enable commercial landlords to recover “pure” rent arrears is set to come into force from April 2014, following the publication of new  regulations in August 2013. The current common law right to distrain for arrears of rent will be abolished and replaced with CRAR.

Currently, Landlords or certified bailiffs (acting on behalf of the Landlord) can enter commercial premises occupied by a defaulting tenant without giving any notice. They have the power to distrain and sell goods/assets up to the value of arrears for all sums reserved under the lease as a rent; thereby removing the need for court proceedings.

The common law right to distrain for arrears of rent is planned to be abolished and replaced with CRAR. CRAR will enable commercial landlords to recover “pure” rent arrears by serving a “notice of enforcement” on the tenant before they can instruct enforcement agents. A seven day notice period will apply, and CRAR can only be used to recover principal rent including interest and VAT payable under the terms of the lease. The sums which can be recovered must be greater or equal to seven days rent. CRAR cannot be used to recover service charges, insurance or other sums due, neither can it be applied to premises which are part commercial / part residential.

CRAR will also impact on subtenants and Section 6 Notices. CRAR will require sub-tenants to be given 14 days notice before a Section 6 Notice takes effect.

What could this mean for property owners?

  • Increase in number of tenants absconding without making payment.
  • Delay in recovery of rent arrears, and other sums due under the lease.
  • Increase in professional fees / court costs incurred by owners to recover arrears, perhaps making it costs prohibitive to pursue debts.
  • Disputes arising between parties as to whether CRAR has been followed correctly, notices served in correct form etc.
  • Cash flow difficulties.
  • Hardening of lending criteria.

Action to be considered by owners / managing agents

  • Adopt a proactive approach to credit control / query resolution.
  • Agree a clear credit control policy and standardised process with advisors to minimise costs.
  • Increased rent deposit requirements on lettings, especially in “bull” market conditions.
  • Earlier consideration towards service of Section 6 Notices, perhaps even serving these as a protective measure the day after the quarter day, albeit this would incur additional costs and potential confusion between owner, tenant and sub-tenant.
  • Increased security requirements within alienation provisions (although will need to balance this with potential impact on rent review).
  • Under finance arrangements, negotiate more time between rent payment dates and debts interest payment dates.

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Scotland steals a march on waste recycling

New Years Day 2014 marks the date on which the requirements of the Waste (Scotland) Regulations 2012 come into force. The Regulations are designed to deliver Scotland’s Zero Waste Plan, launched in 2010, which targets a national recycling rate of at least 70% to be delivered by 2025.

Despite an increasingly prescriptive statutory framework, and financial penalties through rising landfill taxes, as a nation we are still only achieving around 50% recycling from commercial premises.

This, in Scotland at least, is all about to change.

The Regulations make a number of key demands of waste producers which can be summarised as follows:

1. Businesses must present metal, glass, plastics, paper, and cardboard for separate collection

2. Businesses which produce over 50kg of food waste per week must present this for separate collection*

3. Businesses which produce over 5kg of food waste per week must present this for separate collection from 2016*

4. The use of macerators to dispose of food waste in the sewer system will be banned (for commercial premises) from 1st January 2016*

5. A ban on any metal, plastic, glass, paper, and card collected separately for recycling from going to incineration or landfill from 2014

6. A ban on biodegradable municipal waste going to landfill by the end of 2020

While there are implications for waste collection and processing further downstream in terms of infrastructure, capability, and cost there are more immediate implications from a property management perspective. The Regulations obligate managing agents to provide appropriate segregation facilities at all Scottish properties and to work with the waste producers and the occupiers, to ensure they are aware of their obligations. Compliance, for food waste particularly, will require the most engagement as individual catering outlets may not produce 50kg in isolation a shopping centre, for example, with multiple catering units almost certainly would. This engagement will need to be conducted between the occupier, the waste services provider and the managing agent who, as nominated waste managers, are ultimately liable to ensure compliance.

SEPA (Scottish Environmental Protection Agency) are committed to adopting a partnership approach to work with businesses to achieve compliance but will look to tackle high impact and persistent offenders.

As a business M J Mapp are well placed to react to these requirements through our own teams and our relationships with our waste services providers, our clients and our occupiers. A core business objective has been to work with our waste services providers to maximise recycling rates and strive to achieve zero waste to landfill at all properties we manage. To the end of August 2013 we worked with our properties to achieve a 77% recycling rate and a 94% diversion from landfill overall. However, any potential for non-compliance must be flagged at as early a stage as possible to ensure an appropriate level of engagement can take place before the end of 2013 to bring any non-compliant properties in Scotland into line with the new Regulations.

*Excludes businesses located in rural areas as classified by the Zero Waste Scotland website

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i to i research

We recently commissioned i to i research to investigate the perceptions of the UK’s Real Estate Fund Managers concerning property management.

Here is a summary of the key findings:

  • All saw the UK as a highly competitive, monitored, regulated and exacting marketplace for property management.
  • There are competing aims. Service charge costs need to be kept reasonable, particularly in the current market and especially in retail, whilst service levels and provision need to be high and constantly improved to attract and retain occupiers and to meet increased reporting and regulatory requirements.
  • Funds and REITs fall into two camps. Some want a good, but basic, property management service. “Collect the rent, clean the building and make sure we do not get sued”. Others want something more proactive and greater levels of expertise, especially in the areas of sustainability, accounting, asset management and innovation.
  • Clear terms of reference are required, given the increased scope and complexity of the property management function and the difference between a basic and an enhanced service.
  • Some funds have historically used just one agent whilst others have used a large number. There is a move towards using a maximum of two or three, as a result of consolidation in the sector, the increased use of client-hosted IT systems and a desire to reduce the amount of reporting. The general feeling was that more than one agent was required to reduce risk, to increase knowledge and to provide a competitive environment.
  • None of the funds interviewed would consider taking management in-house, due to low margins, high numbers of staff needed, lack of expertise and risk.
  • There was a strong sense that there is place for both specialists and the management departments of the small number of larger houses who remain in the sector. Almost all participants thought that there were around six to eight firms capable of managing a large mixed portfolio.

M J Mapp’s position in the market

  • M J Mapp has a high reputation and is seen by both clients and prospective clients as the leading specialist in the UK.
  • Most saw M J Mapp as slightly fresher and more contemporary in approach than others, and also more commercial and innovative.
  • Clients of M J Mapp were overwhelmingly positive, in particular in relation to the company’s bespoke approach to clients, its focus on property management, quality and depth of the team, high retention rates and professional service delivery.
  • M J Mapp is seen as being able to deliver a very good, efficient and reliable service and additional specialist support and advice when required. Accounting, the quality of its people, overall service delivery and sustainability were seen as key strengths.
  • The decision to open regional offices and the creation of specialist large office building and retail schemes were widely welcomed, as was the decision to keep its accounting function in central London.

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