From 1 April 2023, many commercial properties in England and Wales having an energy performance certificate (EPC) rating below E will be deemed to be "sub-standard", following changes to the 'MEES Regulations'. By 2027, the EPC standard is set to become a C and by 2030, a B – working towards the UK net zero strategy by 2050. Come 1 April this year, landlords face being prohibited from granting new leases and continuing to let out properties, while tenants face the risk of increased rents and service charge.
Duties on Landlords
Where landlords intend to grant new leases or continue existing leases of sub-standard properties, they will either need to 1) make energy efficiency improvements raising the property to achieve an EPC of at least an E rating or 2) register a legitimate reason on the ‘Exemptions Register’ for not providing an energy rating of E or above.
Exemptions and Exclusions
Some exemptions requiring registration are expressly stated as such within the MEES Regulations, others are not but have the same effect, and some result in the regulations simply not applying.
The main ones include: Temporary buildings of 2 years or less, buildings that are not heated or cooled, buildings less than 50sqm, properties due to be demolished, owner-occupied buildings, all improvements possible have been made, ‘7-year payback’ i.e. the works will not pay for themselves within 7 years, specific wall insulation exemption (requiring expert evidence that it is not appropriate for the building), consent reasonably withheld, works would devalue the property by more than 5%, a new landlord (temporary exemption for 6 months).
Duties on Tenants
A tenant is under a duty to 1) allow an energy assessor access where it is reasonably necessary for the purposes of preparing an EPC and recommendation report and 2) co-operate with the landlord to allow the landlord to comply with the duty to prepare an EPC and recommendation report (Energy Performance of Buildings (England and Wales) Regulations 2012/3118).
A tenant has the power under the MEES Regulations to request consent from the landlord to make any improvements at its own expense. Here, the landlord (and any superior landlord) is under a duty not to unreasonably withhold consent. If the landlord is unhappy with a tenant's proposal, it can make its own counterproposal. But, where a MEES improvement notice has been issued against the landlord, any tenant's request will cease to have effect.
Penalties for Non-compliance
The penalty for non-compliance will be based on 10-20% of the rateable value of the property.
A breach of less than months = £5,000 fine and 10% of rateable value (to a maximum £50,000). A breach of greater than 3 months = £10,000 fine and 20% of rateable value (to a maximum £150,000).
The fine for registering false or misleading information on the exemptions register is £5,000. The fine for a failure to comply with improvement notice is also £5,000.
Dealing with the cost of improvement works
Whilst ultimate responsibility to complete improvement works rests with the landlord, it may be the costs of those works are recoverable via service charge provisions in a lease or, possibly in accordance with the tenant's repairing covenants.
The RICS Professional Statement on Service Charges in Commercial Property (1st ed.) provides that "subject to the terms of the lease and the principles set out in [this] professional statement, any subsequent costs of improving energy efficiency might be a legitimate service charge item, provided that there is a proportionate cost benefit to the tenant".
If you are a commercial landlord or tenant set to be impacted by the changes to EPC ratings or, you have any concerns or questions about the impact the changes may have on you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies contact.