New Prime Minister Rishi Sunak confirmed in his opening speech on 25 October 2022 that he promises to deliver on key manifesto commitments, including protecting our environment. The desire to take action against the climate crisis is ever growing and is at the forefront of our collective concerns. Environmental consciousness used to be a choice but that is not the case anymore.
As the Government push forward with their agenda to reduce carbon emissions, landlords of non-domestic (commercial) properties must prepare for the unavoidable tightening of measures from April 2023. Our update will explain what to expect and how to prepare with only five months to go.
Current rules for EPCs and MEES for commercial properties
An EPC is an energy performance certificate, issued by an assessor, which details the energy efficiency of the property to which it relates and is valid for 10 years from registration on the EPC Register. An EPC is required following the construction of new buildings, where certain alterations are undertaken or where an existing building is to be sold or rented out (including assignment of an existing lease).
The Minimum Energy Efficient Standard (MEES) Regulations ("MEES Regulations") prohibit granting a lease of a commercial property with an EPC rating of F or G as this is classed as sub-standard, unless improvements works are carried out or an exemption applies.
From 1 April 2023, the prohibition will apply to all existing leases of commercial properties meaning that landlords cannot continue to let properties with an EPC rating of F or G.
Commercial properties let for more than 99 years or less than six months fall outside of the remit of MEES Regulations. The MEES Regulations will only apply if a property already has an EPC or the requirement to obtain one is triggered (for example by carrying out works or selling the property). It is not realistic or advisable to not obtain an EPC to avoid complying with MEES Regulations given there are multiple triggers as mentioned previously and extra triggers are being considered by Government.
Exemptions
The prohibitions on letting sub-standard properties are not absolute. There are certain exceptions which, if applicable, allow a landlord to let or continue to let a sub-standard commercial property. If an exemption applies, this must be registered on the Private Rented Sector (PRS) Register and will generally be valid for five years but note that it cannot be transferred. Examples of exemptions:
- Consent exemption – where the landlord, despite using reasonable efforts, has been unable to obtain the necessary consents from any third party (e.g. tenant) whose consent is needed for a proposed energy efficiency improvement;
- Devaluation exemption – where the landlord has obtained a report from an independent surveyor stating that making the relevant energy efficiency improvement would result in a reduction of more than 5% in the market value of the property;
- All relevant energy efficiency improvements made exemption – where a landlord has made all the possible relevant energy efficiency improvements and the property is still below the minimum rating, or there are no improvements that can be made; and
- Economically efficient exemption – where the costs of carrying out the relevant improvements will not be recovered within seven years.
Potential penalties
Breaching the MEES Regulations can result in two key penalties applying: a financial and/or publication penalty. For a breach of letting restrictions for three months or more, a landlord could face a fine up to £150,000. If a landlord provides false or misleading information, or fails to comply with a compliance notice, a fine of £5,000 can be applied. If a breach occurs, details may also be entered onto the publicly accessible part of the PRS Exemptions Register. This carries the risk of adverse publicity for a landlord and may make a prospective buyer or tenant more cautious.
Future trajectory for commercial properties – the road to 2030
The Government have projected their future goals for EPCs following April 2023 and landlords need to be aware that further measures are likely to be imposed in the years to come. The biggest proposal being that the minimum EPC rating will increase to C by 2027 and to B by 2030. If implemented, this means that from 2023, landlords will have four years to increase to a C rating and from 2027, landlords will have three years to reach a B rating (or make sure an appropriate exemption is registered).
Further Government reforms currently being considered to watch out for include:
- Increasing the number of triggers for a new EPC, for example extensions and conversions which require planning permission could be a new trigger as these fall out of the current threshold for property modifications;
- Decreasing the validity period of EPCs from 10 years;
- Removing provisions which give leeway for the property to continue to be marketed without an EPC, meaning there would be no circumstance in which a property could be marketed or let without a valid EPC certificate;
- Introducing a requirement for commercial properties which are let to continually have an EPC;
- Introducing a property compliance and exemptions database;
- Local authorities to be given power to inspect commercial properties;
- New requirements for post-improvement EPCs regardless of whether lettable units or heating/air-con systems are affected;
- Exemptions to be renewed at the start of each compliance window (rather than running for a five year period); and
- Requiring listed buildings which are rented out to have an EPC (a current area of confusion which should be clarified in the future).
Landlord's next steps
It is expected that eventually the majority of commercial properties will require EPCs as the Government push ahead with their agenda to net zero, meaning MEES Regulations will also need to be complied with. The minimum standard increasing to C, then B, may seem some time away but landlords may wish to get ahead of the regulatory change as improvement works may be time consuming and costly.
With April 2023 fast approaching, landlords should not hesitate to take action and:
- Review their property portfolio to identify sub-standard (or potentially sub-standard) properties;
- Consider if any available exemptions apply and make sure that they are registered (check expiration dates of existing exemptions also);
- Check whether any current EPC ratings expire;
- Consider and seek legal advice from the Gowling WLG team as to who should appropriately pay for the works and engage with the tenant on how to minimise disruption of the works;
- Seek advice from the Gowling WLG team on the financial aspects of improving a property to meet the minimum standard as it can be costly where works are substantial;
- Seek advice from the Gowling WLG team on whether to include provisions in any new lettings dealing with responsibilities under MEES Regulations;
- Review "Green" provisions in leases which aim to assist in complying with MEES Regulations and make sure they are fit for the upcoming changes.
Environmental alternations should not be seen as a purely legal and regulatory exercise; improving a building's carbon footprint will likely result in better property valuations and strengthen a building owner's reputation. Given the environment is a hot topic and set to stay, tenants may be more inclined to lease buildings that are going above and beyond to minimise their carbon footprint. Landlords are encouraged to begin creating strategies on how to approach April 2023 and beyond to make sure the roll out is smooth across their property portfolios.
Contact
For more information, please contact Matt Walker, Clare Swinnerton or Haseena Hussain.