A full ten years after energy performance certificates (EPCs) were introduced for commercial property the humble EPC is finally set to come of age in April by the introduction of minimum energy efficiency standards (MEES).

Whilst the past decade has seen EPCs being required as a pre-condition of the sale or letting of commercial premises the information revealed by these colourful pieces of paper has been until now largely ignored by the market with capital and rental values remaining unaffected by energy efficiency or lack of it. The introduction of MEES in April, which has been on the cards since the passing of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, will finally see EPCs gaining teeth in the letting market, as the failure of a property to achieve an EPC at level “E” or above will impact on its owner’s ability to let it out and thus directly affect its investment value.

From 1st April it will become unlawful to let out commercial premises with an “F” or “G” rating, whether by way of lease to a new tenant or renewal lease to an existing tenant.  As current leases come to an end, landlords of such properties will be obliged (subject to exemption) to carry out potentially expensive upgrade works in order to preserve the value of their asset. The alternative is unpalatable to most, since it comes in the form of ‘naming and shaming’, as well as a fine of up to £150,000.

It is worth pointing out that the regulations don’t impose this obligation on:

• property owners per se, so that commercial property can continue to be bought and sold and owner-occupied without any such works being carried;

• the grant of a lease for a term of less than 6 months;

• the grant of a lease for a term of more than 99 years; or

• the letting of properties which don’t require an EPC (which includes most listed buildings).

As alluded to above, there are exemptions to the requirement to carry out energy efficiency works to “F” or “G”-rated property; these are broadly as follows:

• the landlord has been unable to obtain consent from the tenant in-situ or other requisite third party to the carrying out of such works; or

• an independent surveyor has confirmed that the carrying out of such works would result in a reduction of over 5% in the market value of the property or the building of which it forms part.

To be valid, the exemption must be registered on the Private Rented Sector (PRS) Exemption Register maintained by the Secretary of State (which will be publically available from 1st April).  Such registered exemption is only valid for five years, so that it will be necessary to regularly consider whether the MEES can be implemented or whether the exemption still applies.

There are also some temporary exemptions, the most significant of which will allow a landlord a six-month grace period in which to carry out required energy efficiency improvements on the grant of a renewal lease pursuant to the Landlord and Tenant Act 1954.

It is important for both landlords and tenants to note that the validity of the lease and the enforceability of its terms are not affected by the regulations.  A letting of sub-standard property may see the landlord penalised under the regulations, but will not give either party an excuse to shirk their obligations under the lease terms.

With an eye to the future, property owners and potential investors should bear in mind that from 1st April 2023, the reach of the regulations is set to extend to make it unlawful to continue to let “F” or “G”-rated commercial property unless all possible cost effective energy efficiency improvements have been made or one of the exemptions applies and has been registered.

Practical Points

• Landlords of commercial premises with an EPC rating of lower than “E” who intend to let or re-let their properties should start seeking surveyors’ advice on the available energy efficiency improvements and, where they have sitting tenants, reviewing their leases to ascertain whether they have reserved the necessary rights of entry in order to carry out those improvement works.

• Such landlords would also be well-advised to look in detail at the available exemptions and act quickly to register any relevant exemption on the PRS Exemption Register in order to take advantage of it.

As the government continues to look for new ways in which to achieve its international obligations in respect of counter-acting climate change, we can no doubt expect to see the impact of EPCs and the ramifications of energy inefficient buildings becoming ever greater.  The days of ignoring that EPC rating are long gone.

by Nicola Jackson
Associate Partner