Smart buildings: retrofit for purpose?

In the second of their three-part smart buildings series, Tim Streather and Jackie Newstead ask: is retrofitting an existing building worth it? Smart buildings utilise integrated technology systems to optimise energy usage and improve building performance. It is therefore no surprise that they are becoming increasingly popular among landlords and tenants. Yet, retrofitting an existing building with the necessary technology can be a challenge which requires careful consideration of stakeholder management, legal implications, and costs. So, what should be considered? Physical practicalities When retrofitting an older building to incorporate smart technology, the physical practicalities can be difficult obstacles to overcome. Each system must be installed correctly to integrate with the building’s existing infrastructure. Once practical elements are established, it is fundamental that physical restrictions are considered. For example, is there enough space to accommodate new equipment and infrastructure? This can be especially challenging in historic buildings not constructed with modern-day technology in mind.  This often involves upgrading existing systems to incorporate sensors and automation devices to help monitor and control various aspects of the building’s performance, including lighting, heating, ventilation and air conditioning systems, and energy usage.  Smart buildings are often designed to enhance occupant experience. Lighting systems and temperature sensors enable tenants to adjust the building’s environment to their liking. Data management systems ensure that the vast amounts of data generated in a smart building are captured and analysed, optimising the building’s performance. Retrofitting a building with sensors and software can be a complex process, which requires careful planning to ensure that the systems are installed correctly. Tech maturity has made retrofitting for energy efficiency more cost-efficient and less disruptive to occupants, with a quick return on investment through energy savings, making it a smart investment. Impacts for stakeholders In addition to the physical practicalities, retrofitting a building with smart technology also has significant implications for stakeholders such as asset owners, landlords, tenants, service providers, and employees.  Asset owners and landlords are responsible for financing the retrofitting process and must consider the costs and benefits of the investment. As a long-term cost-effective process, stakeholders may see potential in smart technology retrofitting as it increases the building’s value, attracts new tenants, and enhances sustainability credentials. However, they may choose not to invest in retrofitting if the costs outweigh the benefits.  The impact, however, is not limited to those with a financial stake. Service providers, such as facility management companies, can benefit from smart technology that enables them to optimise operations. By automating tasks to improve efficiency, sensors can automatically detect maintenance issues and provide real-time data on occupancy, energy usage, and air quality, while predictive analytics can help FM teams schedule preventive maintenance tasks and avoid costly downtime. From this data, energy management systems can automatically adjust heating based on weather conditions and occupancy. This will reduce costs and improve profitability for FM companies. However, there may be upfront capital costs, including the cost of purchasing and installing sensors, and other hardware and software components. To cope with the updated technology systems, FM companies may also need to invest in training and education to ensure employees are able to effectively manage the building’s systems. Tenants and building users should be aware of potential disruption during the retrofitting process and the time needed to adapt to new technologies before embracing their full potential. To adjust to the digitalised workspace, employees may require training.  Financing the retrofit What are the costs and who is responsible? These can vary widely depending on the scale of the works and the technology being installed. Landlords may be able to finance the works themselves or they may seek financing from lenders or investors. Tenants may also be asked to contribute to the cost of the works, either through increased rent or service charges. What are the legal implications? In the same way as it would for any works being undertaken to a building, the owner will need to consider what consents would be needed for the retrofitting works. Depending on the extent and nature of the retrofitting works required, planning consent may be needed for them. Even if it is not, building regulation approval will probably be needed. Particular attention is needed for listed buildings to ensure that any listed building consents are obtained. If the works involve any change to the exterior appearance of the building, such as the addition of any external sensors, then conservation area consent might also be needed, if the building is within one. If the building is owned under a long lease then consents may also be needed under the headlease from the freeholder, so the headlease will need to be checked to see if there are any constraints on works that would be triggered by the retrofitting works. That would be more likely if any of the works require structural alterations to the building as part of their installation. Next on the checklist is insurance. Insurers need to be notified before works commence and may have specific requirements in relation to the methodology of the works. They will also likely want to see evidence of the contractor’s insurance. There might also be specific insurance-related obligations in a headlease to check for. As the retrofitting works are going to impact on the current services in the building, the building owner will also need to check that undertaking those works does not invalidate or compromise the benefit of any existing contracts or warranties. It is not unusual for services contractors to include language which would mean they are no longer liable for defects in the system if another contractor has interfered with it in any way. One solution to that is to use the same contractor, but that may not always be practical. Think also about any other third party consents. It is unlikely access will be needed over third party owners’ land, but not impossible if, for example, sensors are being fitted to the building’s exterior. Access and tenants Finally, the building owner will need access to the building in order to undertake the works. If the building is unoccupied at the time, then there should be no problem in accessing the necessary areas.  If the building is tenanted then the owner will need to consider whether access is needed to the areas actually occupied by the tenants or whether the works can be done within the common areas. If access is needed to leased areas then they must consider whether sufficient rights have been granted in the occupational leases to allow the landlord to access the leased areas to undertake the works. Typically a lease would allow a landlord access for repair, but it may not allow access for undertaking “improvements”, which is how the retrofitting works would be classified. It may be necessary for the owner to come to a separate agreement with the tenant or tenants to allow the works to go ahead. That then leads to the question of who would pay for the retrofitting works. In multi-let buildings it is worth checking whether any of the heads of expenditure in the service charge might cover the cost of the works. The works should benefit all the tenants in the building, so there may be an argument that the tenants should pay collectively.  It is more likely though that they would be regarded as improvements and the cost excluded from the service charge, leaving the owner to pay. Under the Model Commercial Lease, for example, the costs of improvements cannot be charged to the tenants under the service charge but, if there are elements of the works that could be seen as a reasonable and cost effective replacement or renewal of existing systems for the benefit of the tenants or to improve the environmental performance of the building, then that element of works might be recoverable. For single let assets it would be unlikely that the tenant would have any obligation to pay for or contribute to the cost of the works, so that would fall to the building owner. Once the retrofitting works are done, the owner will also need to check whether any approvals are needed from the occupiers of the building to operate the newly-installed equipment. It should check if the data that is being captured by the new equipment contains anything sensitive that would require consent under the Data Protection Act 2018 and create a strategy for obtaining any required consents. Retrofitting a building with smart technology is a complex and challenging process, requiring careful consideration of the physical practicalities, stakeholder management, legal implications, and cost. However, the benefits of smart buildings, from improved energy efficiency and enhanced user experience to increased transparency and collaboration among stakeholders, are undeniable.  Tim Streather is managing director of Spica Technologies and Jackie Newstead is a partner in the real estate team at Hogan Lovells See also: Time to get smart with our buildings Image © Andrey Suslov/Shutterstock