In the light of the cost-of-living crisis, the attention paid to reducing carbon emissions and becoming more energy-efficient has never been greater.
The UK government views the improvement of properties' Energy Performance Certificate (EPC) ratings as key to achieving net-zero carbon by 2050, and new regulations on EPC requirements for existing commercial tenancies are about to come into force.
Current EPC ratings run from A to G, with buildings that are rated A considered the most energy-efficient, and those rated G the least.
The Minimum Energy Efficiency Standards (MEES) were introduced under part 3 of The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. Regulation 27(2)(a) made it unlawful for landlords to grant new leases on commercial premises from 1 April 2018 if the EPC rating was below an E.
From 1 April this year, all non-domestic private rented property must have an EPC rating of E or above. The new minimum EPC requirement will therefore apply to any existing leases, not just new ones.
Exceptions to the new rules include leases with a term of less than six months or more than 99 years, or if an EPC is not necessary for other reasons under the standard requirements for such certificates (see Regulation 20(2) of The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007).
For all other existing commercial tenancies, it will be unlawful for landlords to continue to let commercial properties with a current valid EPC rating of F or G.
If the EPC rating of a let commercial property was F or G but that 10-year EPC certificate has now expired but the term of that lease is continuing, the liability to do any upgrade works does not kick in on 1 April.
A landlord is 'safe' from having to bring the property up to a minimum E standard until a new EPC is triggered (for example, by the parties renewing the lease or if the tenant carries out alterations to the property which mean a new EPC is required).
Therefore, landlords are likely to want to include wording in their tenancy documents which prohibit tenants from being able to commission a new EPC for the property (and thus triggering a requirement to do upgrade works years before the landlord was anticipating having to carry them out).
There will be serious sanctions for non-compliance, including the following financial penalties:
Adverse publicity and reputational damage is also possible, because details of the breach may be published in the Private Rented Sector (PRS) Exemptions Register.
Where a landlord continues to let a non-compliant commercial property, this breach of regulations does not affect the validity or enforceability of the lease itself.
There are some exemptions to the minimum E requirement, meaning that your commercial property may not be subject to the changes in regulations. If any of the following apply and you are the landlord, you must register the exemption on the PRS Exemptions Register.
Save for the six-month extension, the exemptions only last for around five years, so it is important to make note of the expiry date so you can review the situation again in time to avoid incurring any future penalties.
Once the exemption expires, landlords must try again to improve the EPC rating to an E. If this is still not possible, they must register a further exemption that will need to include reasons why it was not possible to achieve an E rating.
The existing EPC exemptions – where no certificate is needed at all – still apply. These require you to demonstrate that your building is:
In order to avoid any penalties, landlords should first check whether the EPC of their premises meets the minimum E requirement.
If it does not and the landlord is not eligible for any exemption, the required works must be carried out to raise the rating before 1 April this year. If the landlord thinks that an exemption applies, it should register this on the PRS Exemptions Register, noting the expiry date.
Legally, the burden of ensuring a property complies with the minimum EPC requirement falls on the landlord. In practice, however, the burden of paying for such works will depend on the wording of the lease, whether new or existing.
Commercial landlords should bear in mind that the minimum EPC rating is likely to be raised further, from E to C by 1 April 2027, and to B by April 2030.
A version of this article was previously published by Herrington Carmichael in January. The article reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to any specific matter
Prof. Sara Wilkinson FRICS, Dr Gill Armstrong, Dr Kusal Nanayakkara, Mark Willers FRICS, Prof. Jua Cilliers and Dr Robert Fleck 08 December 2023