EPC and Energy Efficiency in Leased Commercial Properties – Don’t be an April Fool!

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EPC and Energy Efficiency in Leased Commercial Properties – Don’t be an April Fool!

EPC and Energy Efficiency in Leased Commercial Properties – Don’t be an April Fool!

From 1 April 2023 landlords will be unable to let commercial properties with an EPC rating below band ‘E’ to new or existing tenants. This is a development on the implementation in 2018, of regulation 27 of the Energy Efficiency (Private Rented Property) Regulations 2015, more commonly known as the “MEES Regulations”, which means that it is unlawful for a landlord of commercial property to grant new leases if the EPC rating for the property is below E (unless one of the exemptions applies).

From 1 April 2023 this will include properties which are ‘continued to be let’ (meaning all properties where a lease in respect of which the lease term runs beyond the start of April), making it imperative that landlords take appropriate steps to ensure that their properties comply with the necessary energy performance standards (or exemption).

Exemptions fall into four categories which are as follows:

No further improvements

This exemption means that it is not necessary to meet the minimum EPC rating of E, where a landlord can show they have made all the ‘relevant energy efficiency improvements’ that can be made to the property or alternatively show that no further improvements can be made, resulting in the property having a sub-standard energy efficiency rating. In these circumstances, details of the exemption must be registered on the PRS Exemptions Register before the property can be let out to a new tenant or an existing tenancy be allowed to run beyond 1 April 2020 for the domestic sector and beyond 1 April 2023 for the commercial sector. The landlord must provide evidence that the exemption applies (this is proof that certain improvements will not meet the seven year payback rule, which means that simple payback of the capital cost through energy cost reductions can be achieved over seven years).

Upon successful registration, the exemption will last for 5 years, after which the exemption will expire and the landlord must take steps to try and improve the property’s EPC rating so that it achieves band E or above. It is possible to register a further exemption if this cannot be achieved.

Inability to obtain consent

In certain circumstances, it may not be possible to improve a property’s energy efficiency rating unless the landlord can gain the necessary consent from certain parties. This can include the tenant or a superior landlord or mortgage lenders, but in cases where such improvements require planning permission then also consent from local authorities. In these circumstances, the landlord may be able to register an exemption if they can provide suitable evidence of any correspondence and/or relevant documents which shows that consent is necessary for achieving a relevant energy efficiency measure and such consent was refused, or was granted subject to a condition that the landlord could not reasonably comply with.

A registered exemption will normally last for 5 years, after which the landlord must try again to improve the EPC rating of the property. As before, if this is not achievable then a further exemption may be registered. If an exemption applies due to the lack of consent from an existing tenant, then the exemption only applies whilst that tenant remains in their lease, after which the improvements will need to be made before a new lease is granted.

Devaluing Effects

If the landlord has obtained a report from an independent surveyor (whom is listed on the Royal Institution of Chartered Surveyors register), which advises that the installation of specific energy efficiency measures would result in a reduction of more than 5% of the market value of the property (or the building it forms part of) then an exemption may also apply.

Within the surveyor’s report, it must clearly list all the recommended energy efficiency measures for the property that would result in it becoming devalued. Any relevant improvements which are not covered by the report, will still be required to be installed by the landlord (unless another exemption applies).

Registration of the exemption will last for 5 years, after which time the landlord must take steps to improve the property’s energy efficiency rating (if this is not possible, then a further exemption may be registered).

Landlords becoming subject in exceptional circumstances

There are instances where the Regulations take into account the circumstances upon which someone has become a landlord (i.e. it would be deemed unreasonable to expect someone who has suddenly become a landlord to comply with the Regulations immediately). This allows for a temporary exemption which will last for 6 months from the date that they become landlord, after which they will have to improve the energy efficiency rating of the property or register another exemption. These circumstances cover:

  • (i) The grant of a lease due to a contractual obligation;
  • (ii) Insolvency of the tenant (with the landlord being that tenant’s guarantor and subsequently taking over the lease);
  • (iii) The landlord, acting a guarantor or former tenant, exercises the right to obtain an overriding lease of a property under section 19 of the Landlord and Tenant (Covenants) Act 1995;
  • (iv) Creation of a new lease;
  • (v) A new lease has been granted under Part 2 of the Landlord and Tenant Act 1954;
  • (vi) A new lease has been granted by a court order (other than that detailed above); and
  • (vii) Where a landlord becomes a landlord due to acquisition of a property and continues to let (this already applies from 1 April 2020 to privately rented properties).

Failure to comply with the above could result in a landlord being liable for civil penalties, which includes fines not exceeding £150,000 for non-domestic properties. The penalties are based on the greater of a fixed amount and a proportion of the rateable value of the property. Landlords should also remember that failure to provide any EPC rating to a prospective tenant can result in fines of between £500 and £5,000 based on the rateable value of the building.

With 1 April 2023 less than two months away, many landlords may have to act quick so that they do not find themselves in breach of the MEES Regulations.

It’s also worthwhile noting that, whilst the current minimum rating is ‘E’, there are on going government consultations to implement further changes to increase the minimum energy efficiency requirements for commercial property to a ‘B’ rating by 1 April 2030, with a possible interim uplift to a ‘C’ rating from 1 April 2027.

Get in touch

If you have any questions regarding this article or any queries regarding leases then please contact Lyndsay Kirkby.

This article was prepared by Sidonie Emerson-Quorn.