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EU rule for SIPP rented commercial property from April 2018

Martin Tilley, director of Technical Services, Dentons Pension Management explains the affect on the SIPP and SSAS market of the Energy Performance Certificate

Commercial property has for a long time been a stalwart of the truly self-invested market, found heavily in both self invested personal pensions (SIPPs) and small self administered schemes (SSASs). SIPP and SSAS operators will have accumulated vast books of properties acquired over potentially the last 40 years.

In the run up to the EU referendum last month, there was a noticeable uncertainty in many of the financial markets, including commercial property. We perceived that with a ‘remain’ vote the log jam of potential commercial property acquisitions within self invested pensions might clear and the sector would carry on with more certainty of outlook.

The perhaps unexpected result of the referendum however has muddied the waters and extended the period of uncertainty, which could well have an impact on the commercial sector and therefore on the self invested pension market.

Energy efficiency of buildings

There is another European influence that may cause a further impact on the sector over the next two years. Chapter Two of the Energy Act 2011 (EA 2011, derived from the EU Energy Performance of Buildings Directive 2010) required the government to bring into force measures to improve the energy efficiency of buildings in the domestic and non-domestic private rented sector in England and Wales. Accordingly:

• From 1st April 2018, it will be an offence for landlords to grant new leases (including renewals and extensions) for properties that fall below a minimum “E” rating; and

• From 1st April 2023 landlords will be in breach of the Regulations if they continue to let, under existing leases, properties that fall below the minimum “E” rating.

Data from the national EPC register indicates that around 18 per cent of commercial property stock has an EPC rating of F or G and another 20% are rated E.

The Government’s Energy Act, passed in the last Parliament, included a provision that from April 2018 it will be unlawful to rent out a business property with an EPC rating below the Minimum Energy Efficiency Standards (MEES), which is the ‘E’ rating.

A building that fails to meet this requirement (rated ‘F’ or ‘G’) will be classed as “sub standard” and may suffer a substantial drop in value unless measures are taken to improve and upgrade its energy efficiency.

Fines

Any building coming on the market must have a certificate commissioned within 7 days of marketing commencing. If it cannot be demonstrated that an EPC is lodged on the register within 28 days of marketing, Trading Standards could impose a fine. Any fine for breaching the regulations will begin at £5,000 and escalate depending upon the value of the property and the length of the tenancy.

There are some exemptions that may be applied to short-term lets and small premises of under 50m2. However, these are limited and many landlords will find themselves having to carry out energy efficiency improvements to properties if they wish to continue letting them.

Onus on SIPP operators

SIPP operators in particular will want to ensure that any new buildings to be acquired to their own book will meet the new requirements, or that any proposed “sub-standard” property has a clear strategy to meet the requirements and the financial resources in place to implement it.

Whilst in some cases all that might be necessary is installation of more efficient lighting or draught proofing, in some instances, particularly in older properties, far more substantial improvement might be required, such as new a new boiler, roof and wall insulation or new windows and doors.

Similarly, self invested pension providers may have to assess their existing property book under administration and make the underlying owners aware of the regulations and the impact they might have on their value, particularly in the case of older properties.

Although SSASs should by now be operating with a “fit and proper administrator”, who most usually also acts as co-trustee, and who might be expected to be aware of these requirements, many still are not. For these clients, a timely reminder of the requirements and the impact on the value of property if it is sub-standard might be worthwhile.

It should be considered that new occupiers may increasingly favour higher EPC-rated buildings which are more likely to have lower running costs, and also help companies prove they have a strong sustainability and ‘green’ ethic.

The Government itself will only occupy buildings rated higher than a “C” for energy performance.

Visit the Dentons Pension Management website

 

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