EPC Regulation – Reform Affecting Commercial Premises

What is an EPC Rating?

An Energy Performance Certificate (‘EPC’) is a document that records a property’s energy efficiency rating using an ‘A’ –‘G’ grading scale where ‘A’ is the most efficient and ‘G’ the least. An EPC provides a detailed picture of a property’s energy efficiency and, since 2012, has been a legal requirement for most commercial property sales and leases (subject to limited exceptions). EPCs remain valid for 10 years and can be obtained through Government accredited energy assessors.

The regulations that govern EPC ratings in the commercial and domestic rental sector are set out in the Minimum Energy Efficiency Standards (‘MEES’).  The MEES impose obligations on landlords intended to improve the quality and energy efficiency of premises). MEES have undergone significant changes recently, which commercial landlords need to be aware of.

What are the changes?

Since 2018, a minimum rating of ‘E’ has been required for commercial properties when a landlord grants a new lease. However, in April 2023, the MEES was updated to reflect that a minimum rating of E is now also required for the continuation of an existing lease, even where there has been no renewal or assignment of the lease and subject only to limited exemptions.

In addition, the current Government has published their proposed plans for future EPC reforms. If these proposals are adopted,, then:

• From 1 April 2027, a commercial property cannot be let without a minimum EPC rating of ‘C’
• From 2030, a commercial property cannot be let without a minimum EPC rating of ‘B’.

It is important to note that there will be exemptions to these proposals, set out below (Qualifying Exemptions).

What properties/leases are captured by MEES?

The MEES does apply if:

• the property is a building meaning it must be a roofed construction having walls for which energy is used to condition the indoor climate; and
• the property has a valid EPC, meaning the property must have had an EPC commissioned in the last 10 years; and
• the property is or will be subject to lease, which includes a periodic tenancy, a reversionary lease, a renewal lease or a tenancy at will.

The MEES does not apply if:

• the property is not legally required to have an EPC; and/or
• the property is owner occupied; and/or
• the property is subject to a licence to occupy, a short lease (a term of less than six months with no option to renew, or where the tenant has already been in occupation for more than twelve months) or a long lease (a term of more than 99 years).

Qualifying exemptions

If a property is caught by MEES then the landlord may still let it (even with a grade ‘F’ or ‘G’ rating) if one of the following exemptions apply:

1. the consent of a third party (such as a tenant or local planning authority) is required to carry out works but is refused, or such consent has been granted subject to a condition that the the landlord cannot reasonably comply with;
2. the improvements required by the MEES would result in a devaluation of the property by 5% or more or the works would damage the property (valuation evidence required);
3. all cost-effective improvements have been carried out, but this still does not result in an EPC rating of ‘E’ or higher; or
4. the “seven-year rule” applies whereby it can be shown that the improvements would not pay for themselves through energy savings within a seven-year period.

It is important to note that these exemptions are not automatic.  To rely on an exemption a landlord must register in advance on the government’s PRS Exemptions Register and must renew the registration at least every five years.

Consequences of non-compliance

The penalty for non-compliance is a fine applicable per breach and based on 10-20% of the rateable value of the property (with a minimum fine of £5,000 and up to a maximum fine of £150,000).  The landlord in breach may also be published on a public register giving details of the breach.

How can Landlords prepare for these changes and avoid financial / reputational consequences?

If they haven’t already, landlords should prepare for these changes by ensuring they have a valid EPC for each applicable property issued by an accredited commercial assessor.  Landlords can check whether their property has a valid EPC online at: https://www.gov.uk/find-energy-certificate.

In addition, landlords can prepare by reviewing their precedent leases and updating as necessary to reflect the new MEES regulations to include provisions that:

1. facilitate the carrying out of necessary energy efficiency improvements;
2. restrict a tenant from obtaining an EPC certificate themselves unless required to do so at law and/or requiring them to obtain such certificate from an energy assessor appointed or approved by the landlord. This reduces the risk of a tenant obtaining an EPC rating lower than that previously obtained;
3. restrict tenant’s alterations insofar as they will or may result in an adverse effect on the EPC rating;
4. allocate the cost or a proportion thereof of making energy efficiency improvements to the tenant.

Key takeaways

The recent and upcoming changes in EPC legislation will impact commercial landlords in several ways. In particular, it is essential that landlords futureproof their portfolio by considering now how they can improve a property’s energy efficiency. This will ultimately contribute towards the value of the property and future dealings with the property. Commercial landlords also need to assess the cost of any improvement works and plan how these will be financed.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk.