Minimum EPCs – Urgent steps commercial landlords must take to comply

From 1^st April 2023, commercial landlords run the risk of falling foul of important energy legislation changes, in the event their properties have poor EPC ratings. Landlords of such substandard properties leave themselves open to hefty fines as well as reductions in the value of their buildings if they do not carry out energy improvement works, or, an exemption does not apply. Landlords therefore need to consider what options are available to them now, in advance of the impending April deadline.

Current position for EPCs and MEES for commercial properties

An Energy Performance Certificate (“EPC”) provides a valuable insight into the energy efficiency of a building (known as its “asset rating”) and is required where a building is to be sold or let. Since 1 April 2018, under the Minimum Energy Efficient Standard (MEES) Regulations (“MEES”), it has been an offence for commercial property owners to grant new leases of properties that are “substandard”, which is to say that they have an EPC asset rating that falls below an “E” (so either an “F” or a “G”). Various exemptions apply, however, landlords of properties which breach the MEES regulations can face fines of up to £150,000.

Position as of 1 April 2023 and the future

As of 1 April 2023, existing leases that were granted before 1 April 2018 will also be caught by the MEES regulations. This means that landlords will no longer be able to continue to let properties which are substandard without being in breach of the MEES (unless an exemption applies). Landlords are then going to be faced with having to undertake energy efficiency improvements to a property with a tenant in occupation. A tenant is not going to agree to this lightly given the potential interruption to its business that such works might cause and it is unlikely that the lease itself will contain anything that gives a landlord the right to carry out such works.

In addition the Government has consulted on increasing the minimum EPC rating to a “C” by 2027 and to a “B” by 2030 and there has been no sign so far of the Government deviating from these proposals.

Exemptions

A property will not be in breach of the MEES regulations if it can be shown that an exemption applies, although such exemption is required to be registered on the Private Rented Sector (PRS) Register and is likely to be valid for only 5 years. The most common exemption is likely to be the “consent exemption” which is when a landlord has been unable to obtain consent from the tenant if it is needed to carry out the energy improvement works. The landlord has to use reasonable efforts to obtain such consent and there is an assumption that at the end of the 5 year exemption that it will then carry out the energy improvement works (although there is nothing that suggests that the tenant has to consent once the 5 years are up). Other exemptions include:

1. All improvements made – this is where (i) a landlord has undertaken all “relevant energy efficiency improvements” that either achieve payback in seven years or less, or, (ii) where no further improvements can be undertaken;
2. Decrease in valuation – where the relevant improvements will cause the market value of the property to reduce by more than 5%, although such exemption requires an independent valuation; and
3. Economic efficiency – where the energy efficiency works will not be recovered from energy savings within 7 years.

What’s next for commercial landlords

The April 2023 deadline is almost upon us. Whilst enforcement of the MEES (by trading standards) has been limited, this may well change given the Government’s carbon reduction goals and both buyers and lenders are now becoming more reluctant to buy and lend on properties that are substandard or have poor energy ratings. Therefore, landlords need to be prudent and take action by reviewing their portfolios to identify those properties which have poor EPC asset ratings. If any are substandard then they should seek legal advice from Edwin Coe as to whether there may be any available exemptions, or, whether the lease permits the landlord to carry out energy improvement works and whether the landlord is entitled to recover any costs of the works.

If you’re concerned about the impending changes to the MEES or think you might own a commercial property that is substandard, then contact either Neil Flynn or a member of the Commercial Property team to discuss any of these issues further.

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