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Energy Efficiency Requirements for Commercial Leases

on Monday, 28 February 2022.

From April 2023, new legislation will come into force where it will be an offence to let a property which does not achieve a minimum 'E' efficiency standard, we look at the possible impact for landlords in England and Wales.

The Energy Performance of Buildings (England and Wales) Regulations 2012 require an Energy Performance Certificate (EPC) is procured when a property is sold, let or refurbished.

Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 also known as the minimum energy efficiency standards (MEES) set minimum standards for EPCs for private rented properties in England and Wales.

From 1 April 2018, it became a legal requirement that for new commercial leases the property must have an EPC rating of at least 'E' (on a scale from A to G, with A being the most efficient).

From 1 April 2023, the minimum requirement will come into force retrospectively and it will be an offence to continue to let properties which do not achieve the minimum E threshold (unless a valid exemption applies).

It is the landlord's obligation to ensure that the EPC meets the requirements and the obligations cannot be passed to the tenant. However, the cost of carrying out the necessary improvements may be passed on to the tenant under service charge provisions depending on the terms of the lease.

Possible Impacts for Landlords

From 1 April 2023, if a property has an EPC certificate with a rating of F or G, it will be illegal for the landlord to let or continue to let that property unless a specific exemption applies.

A property may be exempt where the landlord has already made all the relevant energy efficiency improvements, or where there aren't any that can be made. Some properties are exempt because the tenancy is either too short (less than six months) or too long (more than 99 years) to be caught by MEES. A property may also be exempt where the works would cause a material net decrease in the property's capital value by more than 5% (this must be verified by an independent surveyor). This is a non-exhaustive list.

Non-compliance with MEES could result in enforcement action and a fine. For breaches with a length of less than three months, the maximum penalty for commercial properties is £5,000 or 10% of the rateable value of the property. For breaches with a length of more than three months, the penalty doubles: the maximum penalty is £10,000 or 20% of the rateable value of the property.

Possible Impacts for Tenants

The changes may result in landlords restricting tenants from making alterations or carrying out works which could reduce the EPC rating of the property. Landlords may also seek to increase service charges to cover the cost of improving the building's energy efficiency.

Future Minimum Standards for Commercial Properties and How to Prepare

The Government has proposed that all commercial properties being let have a minimum EPC rating of at least 'B' by 2030. A consultation ran from 17 March 2021 to 9 June 2021 considering a possible interim change to a minimum level 'C' by 2027. At the time of writing, the Government is yet to provide its response to the consultation and so it remains to be seen how the proposed change will be implemented. Please keep an eye out for our update once the government publishes its response.

Landlord's should prepare now for the changes, starting with a review of their properties to ascertain if they fall below the proposed new minimum threshold. We would recommend landlords consult and engage with occupiers in respect of any proposed works and associated costs.

Both new and existing tenants should understand their property's EPC rating. Where it is below the new minimum thresholds, tenants should review their leases to understand if costs can be passed on. This will allow them to budget accordingly and engage early with landlords as to what the proposed plans are to achieve the new minimum standards.

If you are a landlord or a tenant of a commercial property or for more information on MEES and how they could affect you, please contact Rebecca Beardsley in our Commercial Property team on 07896 119385, or complete the form below.

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