Improving energy efficiency of care home stock - practical steps for landlords

There are various reasons why the care sector has been lagging behind:

1. the primary focus of the operator tenant is on the provision of care and using CAPEX to improve this, rather than improving energy efficiency. 
2. with a large amount of existing care home stock consisting of buildings constructed in the 1980s and 1990s, existing buildings are understandably falling short when it comes to energy performance. Whilst data regarding the EPC ratings of UK care homes is not readily available, it is noted that the average EPC rating of housing stock is between D and E. This fact, combined with recent volatility in energy markets leading to some of the highest energy prices on record, should provide a strong incentive for operators to seek to reduce energy costs at their homes. Whilst the wholesale cost of energy has fallen dramatically since the highs of 2022, managing utility costs will still be at the forefront of operators’ minds. The time is now for landlords, lenders and tenants in the care sector to work together to improve the energy performance of their buildings.  
3. landlords too should be keen to increase energy efficiency of their portfolios in light of their ESG commitments, investor pressures and new regulatory updates which are expected to mandate that all properties by 2027 require a C rating and by 2030 a B rating or they cannot be lawfully let. Whilst improving the EPC rating will be one concern, landlords will also feel the pressure of needing to collect energy usage data in order to report effectively to their investors on the environmental impact of their portfolio. An EPC only gives part of the picture; providing a theoretical measurement of a buildings energy performance credentials. The other part, i.e. accurate data on how a building is performing, is needed for landlords to accurately assess the ESG performance of their buildings. 

With this backdrop many landlords will face an uphill battle in securing the information they need and meeting their environmental commitments. Many care homes are occupied on long leases (typically 20-35 years) put in place many years ago.  These leases are understandably silent on green lease provisions given their age and length. As such, landlords may have limited scope to access properties to collect energy data and/or carry out energy efficiency improvements. In the rare case a lease does have such a right for a landlord, leases will often be silent on who is responsible for the carrying out of such works and, of course, who pays. The sector is therefore often left with landlords negotiating variations and CAPEX commitments with reluctant tenants who do not want to carry out works or enter into significant reporting requirements in an economic climate where there are already significant cost and time pressures. 

The RICS Professional Statement on Service Charges in Commercial Property does provide some useful guidance as to who foots the bill for energy improvements. Its best practice guidance states that the obligation for compliance with MEES rests with the landlord and the cost of obtaining an EPC would not normally be considered as a recoverable item from tenants. However, any subsequent costs of improving energy efficiency might comprise a legitimate service charge item, as long as there is a proportionate cost benefit to tenants. Whilst care homes are unlikely to contain service charge provisions as they are leases of whole, the principles might provide care home landlords with guidance on what a fair approach to cost sharing might look like, where a landlord can demonstrate a cost benefit to a tenant of carrying out energy improvement works. 
 

Practical steps for landlords to take:

Given the direction of travel for the whole commercial property sector to having effective green lease provisions as standard, prudent landlords should:

1. review the EPC standards of their portfolios.  
2. future proof their leases as much as possible by including green lease drafting in all their new care home leases as standard. 
3. facilitate variations to older leases to ensure they can collect energy data from the occupiers’ homes. 
4. engage with their tenants to agree a plan for improvements and set out how long it will take for the cost outlay to be recovered via energy savings. A fair approach can then be taken to cost sharing of the improvements against the time left to run on a tenant’s lease. Where it is not appropriate for a tenant to contribute to or cover the costs of such improvements, landlords need to ensure they have the appropriate rights in their leases to carry out the improvement works themselves.