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European regulation provides a model for Net Zero real estate

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Woolf Christopher
Christopher Woolf

Partner

London

Allen Aemelia
Aemelia Allen

Counsel

London

Headlines in this article

Europe’s real estate decarbonisation rules are among the most stringent in the world. By focusing on efficiency – and allocating responsibility for funding upgrades – they offer an example to follow.

Decarbonising real estate is potentially transformational for Net Zero. According to the UN Environment Programme Finance Initiative, real estate is responsible for 40% of global emissions

The good news is that much of the technology required – from heat pumps and solar panels to low-energy lighting – is readily available.

The challenge, though, is funding. Who will pick up the tab for retrofitting existing stock, particularly in the commercial sector? In the short term, increased energy efficiency will benefit tenants more than owners, yet owners retain the long-term interest in the asset.

EU offers roadmap to deliver Net Zero buildings

The way market forces and energy-efficiency legislation interact in Europe – particularly in the UK – highlights the challenges ahead, and offers a roadmap for how they can be overcome.

In 2010, the EU led the way by introducing proposals for minimum energy performance requirements for both commercial and residential buildings via the Energy Performance of Buildings Directive.

Funding upgrades is the big challenge. In the short term, increased energy efficiency benefits tenants more than owners, yet owners retain the long-term interest in the asset.

These requirements have now largely been translated into national laws. Some countries have also taken a range of further steps to reduce real estate-related emissions. 

The Netherlands, for example, aims to phase out natural gas as an energy source for buildings by 2050. In Baden-Württemberg, Germany, replacement heating systems must either use a minimum percentage of renewable energy, or their owners must implement a package of measures to improve energy efficiency.

UK regime designed to avoid litigation

The UK has developed arguably the most stringent real estate decarbonisation requirements in Europe in the shape of the Minimum Energy Efficiency Standards (MEES) regulations, which were passed in 2015 but are being reformed to deliver the country’s Net Zero strategy. 

Under current proposals, owners of commercial properties will need to raise the Energy Performance Certificate rating of their buildings to level C by 2027 and to B by 2030. 

UK lease agreements typically have a “statutory compliance clause” enabling landlords to pass the cost of statutory changes on to their tenants. 

The MEES regulations take these mechanisms out of the equation by putting no specific obligations on owners to meet the minimum energy efficiency targets. Instead, those that fail to comply will face enforcement action if they grant new leases or continue to let sub-standard property. 

Widespread changes to real estate stock typically become mired in debate over who will pay, but the UK government has been clear that the responsibility for improving energy efficiency rests with the property owner, and the market is responding accordingly. 

By removing ambiguity in this way, it potentially provides a model for other governments to follow.

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