UK: Now The EPC Really Matters

We posted in 2013 on the Regulations that will make it unlawful from 01 April 2018 to let properties with an F or a G EPC rating. These are now in force. There are some time limited exemptions and a few exclusions but now is the time for investors to plan on how they can avoid a lot of the tedious consequences of the Regulations as it is estimated that up to 35% of the commercial premises in the UK are likely to be affected by the Regulations

Known to many lawyers as the MEES Regs (minimum energy efficiency standards) the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 have already been passed along with similar Regulations for domestic property. This post focuses on the commercial sector.

What is the Impact of the Regulations?

The Regulations apply to the non-domestic private rented properties (defined as any property let on a tenancy (including sub-lets) which is not a dwelling – but see the exclusions below).

From 01 April 2018

Landlords of commercial properties must upgrade the energy efficiency of their properties to at least band 'E' -

  1. before the property can be leased to an existing tenant (where the property already has an EPC) or a new tenant; or
  2. within 6 months of a sale where the obligation to improve the property is on the new landlord; and
  3. within 6 months from the date they became a landlord, where a tenancy is granted by operation of law.

From 01 April 2023

From this date the Regulations will start to apply to all existing lettings and not just to new lettings.  In other words if you do nothing about improving the energy efficiency of a non-compliant property, it will be a breach of the Regulations to allow existing leases to continue where the rating is F or G subject to some-time limited exemptions that impose a high burden of compliance.

Any excluded commercial leases?

The only exclusions are –

  • Leases for less than 6 months (provided that the new tenancy does not mean that the tenant will have occupied the premises for 12 months or more in total); and
  • Leases for more than 99 years.

But where a property did not need an EPC then it cannot be caught by MEES eg leases of buildings where the indoor climate is not controlled (no heating or cooling) and it is intended that listed buildings fall outside the ambit of MEES too but the amended EPC Regulations have never been very clear about listed buildings so no doubt we will all go on assuming that is what the Regulations mean (as we do at present).

Where a lease was granted so long ago that it did not require an EPC at the time of the lease then it too will fall outside MEES but market forces suggest that by April 2023 this will not account for many properties!

What Happens If There Is a Breach?

Ultimately the penalty will depend on the rateable value of the property. The maximum penalty is £150,000.

Is Compliance Compulsory in All Circumstances?

Landlords do not have to carry out any improvement works where –

  1. Third Party Consents (eg from the tenant, planning permission, mortgagee's consent etc). To be relieved of its obligations under the Regulations the Landlord must be able to demonstrate that it used its best endeavours (unsuccessfully) to obtain the required third party consent; or
  2. the works are not cost effective. Here the Landlord must be able to demonstrate the Seven Year Payback rule (ie within seven years, the expected energy bill savings will not equal or exceed the cost of purchasing, installing etc the improvement measures) or the Green Deal's Golden Rule applies (which is hard to do since Green Deal finance is not yet available to the commercial sector); or
  3. a qualified expert provides written advice that the works will reduce the value of the property by 5% or more, or that wall insulation required to improve the property will damage the property.

To qualify for an exemption Landlords will have to register and provide details of the exemption claimed.

What Cost?

In all probability the cost of 'up-rating' a property will rest generally rest with the Landlord, particularly in relation to existing leases. This is because, in the main, the cost of improvements falls outside most service charge regimes and are unlikely to fall within a fairly standard tenant's obligation to comply with statute.

Marketability of properties with low EPC ratings will be more difficult unless the upgrading is inexpensive and easy to implement and so we expect that this could begin to affect the valuations of properties with low EPC ratings and we can only assume that market rent reviews will be adversely affected.

What Should Landlords Do?

Don't wait until April 2018 –

  1. Carry out an audit of your property portfolio. How many buildings have an EPC rating below an 'E'? Two important points are worth noting here – (1) experts believe that buildings which once scored an 'E' rating could be downgraded to an 'F' rating by April 2018. This is because EPC scoring gets increasingly tighter as building regulations get more stringent over time and (2) EPCs obtained in a hurry when limited building information was supplied to the energy assessor may get a higher grade if more detailed information can be provided
  2. Where the EPC Rating is 'F' or 'G' (or is at risk of becoming so) implement a plan to improve the EPC rating for the property as part of the investment and asset management. This should include assessing the costs and benefits of improving energy efficiency and weighing these against options to market the property and/or to re-gear the lease.
  3. Use any void periods and lease breaks to carry out any improvement works required to the premises.
  4. Minimise capital costs by incorporating (to the extent possible) EPC improvements into planned refurbishment.
  5. Keep clear records of EPC risk management as this may have an impact on property/portfolio value on any sale and even the availability of any exemptions.
  6. Review your leases to see what rights you have to do works during the lease term and know which tenants you will have to negotiate with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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