Europe is progressively raising the minimum energy performance of its building stock, and the effect on real estate investment is straightforward: buildings that do not meet the standard applicable during a hold period carry a capital expenditure liability, and that liability is part of the price whether or not the buyer has calculated it.
The direction is settled, the detail is national
The European framework sets the direction, and member states implement it through national rules, which vary in timing, thresholds and consequences. Some jurisdictions already prohibit letting buildings below a defined performance level; others tie obligations to renovation or sale. The Netherlands, for instance, has applied a minimum energy label requirement to office buildings, with the consequence that non-compliant offices cannot lawfully be used as such. The point for an investor is that the rule is national and has to be checked for the specific asset, not assumed from the European headline.
The framework in force is the recast buildings performance directive, Directive (EU) 2024/1275 of 24 April 2024. Its Article 9 makes each member state set minimum energy performance standards for non-residential buildings, expressed in kilowatt hours per square metre per year. One threshold must leave 16 per cent of the national non-residential stock above it, a second 26 per cent. All non-residential buildings must be below the first from 2030 and below the second from 2033.
That instrument binds the member state, not the owner. Article 35 gives states until 29 May 2026 to bring the implementing laws into force, and Article 34 requires penalties that are effective, proportionate and dissuasive. The obligation that reaches a building is therefore the national one.
The directive also leaves room in how the threshold is expressed: a numeric indicator or an energy class, the stock as a whole or by building type, with published criteria exempting individual buildings for their expected future use, for serious hardship or for an unfavourable cost-benefit assessment. Compliance of an individual building is checked against its energy performance certificate.
What the Dutch office rule actually prohibits
The Dutch case shows what a national rule looks like once it is written down. Article 3.87 of the Besluit bouwwerken leefomgeving forbids taking an office building into use, or using one, without a valid energy label showing primary fossil energy use of no more than 225 kilowatt hours per square metre per year under NTA 8800, or an energy performance of C or better. The prohibition has applied since 1 January 2023, when it sat in the earlier Bouwbesluit provision.
The rule does not apply where office functions take up less than 50 per cent of the floor area of the building they form part of, nor where the office and ancillary area is under 100 square metres, nor to the categories excluded from the labelling duty itself, which include listed monuments. Where the necessary measures have a payback beyond ten years, the owner may stop at those that pay back within ten.
Article 3.87 is drafted as a prohibition on use: the building may not lawfully be taken into use or used as an office. How that prohibition is enforced, and at what cost, is a separate question. Note also who is bound: article 3.3 puts the duty on the owner of the building, or on whoever is otherwise entitled to carry out works on it, which in some leases means the tenant.
England and Wales take a different route
A second national rule shows how far the machinery varies for the same objective. In England and Wales the instrument is the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which fix the minimum level of energy efficiency at band E. Regulation 27 holds the prohibition on sub-standard lettings, and since 1 April 2023 it bites on continuing to let, not only on granting a new tenancy. The duty sits on the landlord, and the building is not taken out of use.
The sanction is financial and public. A breach running three months or more carries up to the greater of £10,000 and 20 per cent of rateable value, capped at £150,000, plus a publication penalty; a shorter breach up to the greater of £5,000 and 10 per cent, capped at £50,000, on the non-domestic penalty scale. Letting in breach does not affect the validity of the tenancy, so the rent keeps arriving while the exposure accrues.
Regulation 28 defines which improvements count as relevant, chiefly by a simple payback of seven years or less. A landlord who has made all of them and is still sub-standard relies on regulation 29, which sits outside the Chapter 4 exemptions; those include a refusal of consent and a certified devaluation of more than 5 per cent. Each route must be registered before it can be relied on, so the public register holds the seller’s own account of why the building is still sub-standard.
The liability is real and datable
An asset that will need to reach a defined performance level by a defined year has a capital expenditure requirement with a cost and a deadline. Both belong in the underwriting: what work is required, what it costs at current prices, when it must be done, and whether it can be done while the building is occupied. A plan that defers this work beyond the hold period is a plan to sell the liability to someone who will price it.
Compliance work is not discretionary capital expenditure. It is the cost of the building remaining lettable, and a building that cannot be let is not an investment.
Sequencing is the second half of the problem. A label improvement usually comes from measures with different lead times: lighting and controls can often be done floor by floor around occupiers, plant replacement usually cannot, and fabric work on glazing may need scaffolding, permissions and vacant space. The programme is built against the lease expiry profile, not against the deadline alone.
This is where the hold period and the deadline collide. Works scheduled for year six of a five year hold are not works, they are a disclosure. If the deadline falls inside the hold, the capital has to be committed, the facility has to permit it and the business plan has to absorb the income lost while the work is done.
Diligence, price and the sale contract
In diligence the energy position is a document exercise with a defined output. The valid certificate, with its date and its expiry. The method under which it was calculated, since a change of method moves a label without anything happening to the building. The floor areas and uses, because the thresholds and exclusions above turn on them. Any registered exemption and its reason. And the works, costed at today’s prices.
Those findings then have to land in the contract. A seller with an exemption on a public register cannot credibly warrant compliance, and a buyer taking a bare compliance warranty has bought a claim rather than a building. What works is a specific indemnity for the identified items, a price reduction of the costed amount, a retention released against completion, or a condition that the seller finishes first.
An inspecting authority asks a shorter set of questions than a buyer does: is there a valid certificate, what does it say, what is the building used for, how large is that use, and does the exemption on the file apply to this building. Every answer is a document. Buildings that fail an inspection usually fail on the file rather than on the fabric.
Where the value divides
The market is separating into buildings that comply, which attract occupiers and institutional capital, and buildings that do not, which trade at discounts that sometimes exceed the cost of fixing them and sometimes do not. That gap is a genuine value-add opportunity for investors who can execute the work, and a trap for investors who buy the discount without pricing the works. The strategic framing is in our note on core, core-plus and value-add.
If the discount is smaller than the cost of the works, plus the income lost while they run, plus the risk that the standard tightens again before exit, it is not a discount. Both rules described above already point at their next step: one sits inside a framework aimed at 2030 and 2033, the other has already had its scope extended once.
Occupiers are now part of the pressure
Beyond regulation, large corporate occupiers increasingly have their own reporting obligations and internal targets, and they are selecting buildings accordingly. A building that fails a major occupier’s own standard has lost part of its tenant universe regardless of what the law requires. That narrowing of demand affects the letting period, the incentives required and ultimately the yield.
Between landlord and tenant, who pays is a matter of the lease, and most leases were drafted before the question existed. Three clauses decide it: the service charge, which determines whether plant replacement is passed on or caught by an exclusion for improvements; the repairing covenant, which separates repair from improvement; and the access clause, which governs whether the tenant can refuse entry. Where the rule prohibits use, as the Dutch one does, the tenant loses the premises too and has a reason to share the cost.
Financing follows compliance
Lenders are increasingly attentive to energy performance, both because it affects the value of their security and because of their own reporting obligations. A non-compliant asset may attract less debt, or debt on worse terms, or require a compliance plan as a condition. That interacts directly with the acquisition financing, as we set out in our note on what lenders require from a foreign borrower. An investor planning to buy a poor building cheaply and fix it should confirm the financing is available before relying on it.
What a lender tests is narrower than a general concern with sustainability. At underwriting it wants the current certificate, the schedule of works and the date by which the asset must comply, and it checks whether that date falls inside the loan term. If it does, the works become part of the funding requirement, as a capital expenditure facility or as equity the borrower has to evidence.
The covenants follow. A milestone covenant measured against the works programme, delivery of the new certificate on completion, and a default tied to the building becoming unlettable are all ordinary now. Valuation is the quieter mechanism: if the valuer marks the asset as unlettable in its present state, the loan to value covenant moves years before the regulatory deadline arrives.
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