What impact will new minimum EPC requirements have?

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.

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).

• For breaches of less than three months, a fine of 10% of the rateable value, from a minimum of £5,000 to a maximum of £50,000.
• For breaches of more than three months, 20% of the rateable value, with a minimum of £10,000 and a maximum of £150,000.

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.

• Seven-year payback test: this is where the cost of works required to the property to bring it up to the minimum EPC rating would be greater than the expected value of saving on energy bills over seven years.
• Third-party consent: some energy efficiency improvements, such as solar panels or insulating external walls, require consent from the local planning authority or another third party. In these cases, where a landlord has used reasonable efforts but the consent has been refused or granted subject to a condition with which the landlord cannot comply, this exemption may apply.
• Devaluation: this applies where a landlord has obtained a surveyor's report that states making the relevant energy-efficiency measures would reduce the market value of the property, or of the building of which it forms part, by more than 5%.
• Recently becoming a landlord: there is an exemption of six months if you have recently become a landlord by purchasing commercial premises subject to existing tenancies and where the EPC is rated E or below. This temporary extension will allow time for landlords to bring the properties up to the required standard.

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.

• listed or officially protected, and conforming to the MEES requirements would unacceptably alter it
• a temporary building used for two years or less
• a detached building with a total floor space of less than 50m²
• due to be demolished by the seller or landlord, who hold all the relevant planning and building consents
• vacant and due to be sold or rented out
• vacant and suitable for demolition and redevelopment
• vacant and the buyer or tenant has applied for planning permission to demolish it.

The full list of exemptions can be found on the UK government website.

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