What are the new regulations on Commercial Property Energy Performance Certificates?

If you are a commercial property investor or a business tenant, you will inevitably have come across an Energy Performance Certificate (EPC) over the last few years. They are required to be provided by a landlord upon the new letting of any commercial property on the open market and are the scale upon which the energy efficiency of a property is assessed. They look like this:

Previously, upon receipt of one of these reports, a commonly asked question would be: ‘what do I need to do with this?’ or ‘what does it mean?’ Previously the answer would frequently be ‘nothing’. EPCs were at best a nuisance for landlords to have to provide, and a chart for tenants to look at and file away with the remainder of the paperwork associated with renting.

However, new Government legislation has been implemented and from 1 April 2018 attention will have to be paid to the rating given on our these charts, and in particular to anything below an ‘E’ rating. From this date, under the Minimum Energy Performance Standards (MEPS) (or the Minimum energy Efficiency Standards (MEES), depending on who you speak to), it will become unlawful for landlords to let a property with an EPC rating of ‘F’ or ‘G’. This means that if you’re trying to rent out a dilapidated old shed with holes in the walls, or let the office area with the rotten wooden window frames, you may wish to think again. The property owner will have to incur the costs of carrying out sufficient works to raise the EPC rating to an ‘E’ or above before it goes on the market. This will apply whether it is a new lease being granted, or a lease renewal- 1954 Act protected or otherwise - a sub-lease, headlease or sub-underlease.

Since 2003, the UK Government, in line with the remainder of the EU member states, committed to the EU directive to significantly reduce CO2 emissions.  It was this directive that imposed the EPCs, originally within the ill-fated Home Information Packs, and, after their prompt demise, as a stand alone requirement. It was only a matter of time before they were required to mean something serious for the business community. Energy efficient buildings reduce fuel bills, are more appealing to potential tenants and, perhaps most importantly, help save the planet.

And the legislation goes further still: from 1 April 2023, ALL properties that are let will be required to have an EPC rating of ‘E’ or higher. The lease may have been granted long before this legislation came into force but this will no longer be suitable protection. It will inevitably have a particularly significant impact on investor landlords, particularly those with large property portfolios. Landlords will have six months from the grant of the lease to rectify the issue where it exists, or a further six months where a non-compliant property is sold subject to a tenancy. It is worth noting that whilst this advice refers to commercial properties, the new legislation also applies to residential lettings.

You might think that no one takes any notice of the EPC ratings anyway, and certainly no one enforces whether or not you even have an EPC in practice. This may be true, however, failure to comply with the MEPS as landlord could incur you a hefty fine. Local authorities will enforce the provisions via their Trading Standards Officers. Where a local authority suspects that a landlord is not compliant and should be, they can serve a compliance notice requesting further information. If this is not provided, or is provided and is not sufficient to prove compliance, the local authority may proceed to issuing a penalty notice. Failure to comply with a compliance notice will earn you a £5,000 fine. Renting out a non-compliant property with less than 3 months non-compliance could land you with costs of 10% of the property’s rateable value, but with a minimum penalty of £5,000 and a maximum penalty of £50,000; for 3 months or more of non-compliance this increases to 20% of rateable value, but with a minimum penalty of £10,000 and a maximum penalty of £150,000. In both scenarios, your non-compliance may be published. Not good for the bank balance, or your business reputation.

There are exemptions, however. Listed buildings, temporary buildings, places of worship industrial sites or agricultural buildings that don’t use much energy, small properties, demolition or development sites are all exempt from the requirement to have an EPC, and are therefore exempt from the requirement to make improvements to increase the EPC rating. Buildings without roofs also fall under the exemption, as do those without an alterable internal climate through heating or air conditioning.

Landlords will be exempt from meeting the minimum standard even if an EPC is required for the property if they can demonstrate that the work is not cost-effective within a 7 year payback or the Green Deal’s Golden Rule; that any necessary consents required for the works cannot be obtained or that the works will reduce the property value by 5% or more. In the event of one of these exemptions being applicable, the landlord must register this on a centralised register known as the Private Rented Sector (PRS) Exemptions Register. Exemptions will last for five years. Providing false or misleading information to the PRS Exemptions Register will also earn you a £5,000 fine, and a suitable public embarrassment from publication.

Landlords should remember service charge provisions, the broadest of which will allow you to recover most, if not all, of these costs through the service charge paid by tenants. However, going forward, and as more people become aware of the changes, tenants are unlikely to want to foot the bill for this potentially expensive work. It could be wise to start implementing a plan of action for any non-compliant properties sooner rather than later to spread the cost.

A business tenant might think that this doesn’t affect them and that it won’t cost any money. See the previous paragraph; beware of all-encompassing service charge provisions, seek caps on the types of costs and add exclusions in your leases for these works, or, better still, make the landlord do the works before you move in. At the end of the day, do you want your landlord to interrupt your business in 7 years time to potentially carry out significant building works to your property? It’s not ideal.

These changes seem to have snuck in quietly under the radar in a fog of uncertainty, and have seemed a long way off for sometime now. However, given that it means that leases being granted now for a term of 7 years or more will be impacted, and in less than 2 years time, new leases and renewals will also all be caught, it may be time to start considering what those multi-coloured bars actually mean and the effect they will have on your business long term. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.