From 1 April 2023, commercial landlords risk being fined if their property is “substandard” (i.e. it has an EPC rating of “F” or “G”). It has been an offence to grant a new lease of a substandard commercial property since 2018 but from next April the net widens significantly to include existing lettings. Landlords therefore need to review their stock, consider what measures are needed to upgrade the property, and whether it is possible to do so if there is a tenant in occupation. Various exemptions are available and, while these are worth considering, they can only defer the deadline rather than make the problem go away. Landlords also need to bear in mind that the minimum rating is likely to rise to “C”, or even “B”, in the near future.
Energy performance certificates (or “EPC”s) have been a feature of the commercial property market since 2008, when it became compulsory to provide one on most sales and lettings. In the early years, little attention was paid to the property’s energy rating and EPCs had a minimal effect on pricing. This began to change with the Minimum Energy Efficiency Standards Regulations (or “MEES”), which have made it an offence since April 2018 for commercial landlords to grant a new lease of a substandard property. Various exemptions apply: for instance, a lease renewal is not caught unless the property already has an EPC. Fines are high - up to £10,000 or 20% of the rateable value, whichever is higher, up to a maximum of £150,000. However, enforcement (by Trading Standards) has been very light, possibly due to a lack of resources. This may change and some local authorities are being given funding to police the area more rigorously.
Existing leases caught from 1 April 2023
On 1 April 2023, the Regulations will be extended to existing leases. Leases that were granted before 1 April 2018 will therefore also be caught. If a property is substandard, there are obvious practical difficulties in a landlord carrying out energy improvements where a tenant is in occupation. Very few leases from this period will allow the landlord to disrupt the tenant’s business to bring the property up to the required energy rating, and it is difficult to see many tenants agreeing to the landlord doing so.
The Regulations don’t really provide an answer to this problem, other than to give the landlord a get-out if the tenant refuses access. This is a limited exemption. The landlord must make “reasonable” efforts to carry out the works. Asking once and being turned down is unlikely to be enough. The exemption lasts for five years and the landlord must upload on to a public register both the fact that it is claiming the exemption and the steps that it has taken to comply. The expectation is that, once the five years are up, the landlord will carry out the works but there appears to be nothing preventing the tenant from refusing again.
Other exemptions are also potentially available, including where the owner can prove that the “improvements” will actually result in a drop in the market value of the property of more than 5% or where the improvements will not pay for themselves in energy savings over a period of seven years. The rapidly increasing cost of energy may make this last exemption less viable.
The consent exemption is likely to be the most useful exemption available to the landlord because of its simplicity. It is easy to imagine this exemption being used far more widely than the government anticipated, where neither landlord nor tenant wants the disruption of carrying out the works. All the more so if, as we will see in a moment, the government raises the minimum standard from “E” to “C” (or even “B”). It is unclear how tightly this area will be policed but it would be wise for landlords to ensure that the tenant’s reasons for refusing consent are genuine. A provision in the lease, for instance, that the landlord may not carry out energy improvements may be construed as an attempt to circumvent the Regulations.
It doesn’t stop there. The government has been consulting on raising the minimum standard. The proposal is that this will be achieved in stages, with properties needing to reach “C” by 2027 and “B” by 2030, accompanied by a more rigorous system where EPCs will need to be submitted for checking. This is a very significant widening of the net, with only about 15% of UK commercial property thought to currently meet this standard. It is unclear how in excess of 1 million commercial properties can realistically be upgraded in such a short timeframe. Many upgrades will be financially unviable or logistically impractical. If the proposals go ahead, we can expect owners to seek to rely on one of the exemptions, so such an ambitious target may backfire.
Whether or not the government’s more ambitious proposals are taken forward, 1 April 2023 is a given and is not far away. Buyers may be reluctant to acquire properties with a poor energy rating and lenders may be reluctant to lend. Care needs to be taken when relying on older EPCs, as many of these are producing a lower rating when renewed due to a change in the assessment criteria. A property that currently satisfies the criteria may become substandard when the EPC is renewed. Landowners need to review their portfolios and identify properties that are at risk. Leases should be examined to see whether they allow the landlord to carry out energy improvements. If they don’t, will the tenant give the landlord access or will the landlord need to rely on one of the exemptions?