New year, new EPC regulations for commercial properties

Important advice for Landlords on upcoming changes to minimum EPC standards As we roll into the new year, it is often a good time to assess that all regulations are in order for our businesses and properties. In the wake of the ‘cost of living crisis’, attention on how to reduce carbon emissions and become more energy efficient has never been more prominent. The government views the improvement of property Energy Performance Certificate (EPC) ratings as a key component in achieving the ‘net zero’ by 2050 goal, and the new regulations on EPC requirements for existing commercial tenancies are about to come into force. The current EPC rating system is expressed on a scale from A to G. An ‘A’ rating indicates the building is very energy efficient, with ‘G’ being the worst rating. The implementation of the Minimum Energy Efficiency Standards (MEES) in 2018 made it unlawful for landlords to grant new leases on commercial premises if the EPC rating was less than an ‘E’. This came into force in October 2016. What is changing? However, from 1 April 2023, the minimum ‘E’ requirement will now apply to all “non-domestic private rented property” so will apply to any existing leases, not just newly granted leases. There are some exceptions to the new rules – for example for leases with a term of less than six months or more than 99 years, or if an EPC is not required for other reasons under the standard EPC requirements. For all other existing commercial tenancies, it will be unlawful for Landlords to continue to let commercial properties where they have a current valid EPC rating of ‘F’ or ‘G’. If the EPC rating of a let commercial property was F or G but that 10-year EPC certificate has now expired but the term of that Lease is continuing, the liability to do any upgrade works does not kick in on 1 April 2023.  A Landlord is ‘safe’ from having to bring the property up to a minimum E standard until a new EPC is triggered (for example by the parties renewing the Lease, or if the Tenant carries out alterations to the property which mean a new EPC is required).  Therefore landlords are likely to want to include wording in their tenancy documents which prohibit tenants from being able to commission a new EPC for the property (and thus triggering a requirement to do upgrade works years before the landlord was anticipating having to carry them out). What happens if I breach these new regulations? There are serious penalties for non-compliance in the form of financial and publication penalties. The financial penalties are as follows: • For breaches of less than 3 months – a fine of 10% of the rateable value (the minimum fine is £5,000, and the maximum is £50,000). • For breaches of more than 3 months – 20% of the rateable value (with a minimum penalty of £10,000 and a maximum penalty of £150,000). As for the publication penalty, adverse publicity and reputational damage is possible as details of the breach may be made public through entry in the Private Rented Sector (PRS) Exemptions Register. It is worth highlighting that where a landlord continues to let a non-compliant commercial property, this breach of regulations does not affect the validity or enforceability of the Lease itself. Is my property exempt from these changes? There are some exemptions which can apply to the minimum ‘E’ requirement, meaning that the changes in regulations may not apply to your commercial property. If any of the below exemptions apply, the landlord must register the exemption on the PRS Exemptions Register. These are as follows:

• The seven year payback test – if the cost of works required to the Property to bring it up to the minimum EPC standard would be greater than the expected value of saving on energy bills over seven years;
• Third party consent – some energy efficiency improvements (ie solar panels or insulating external walls) require local authority planning or other third party consent. In these cases, where a landlord has used reasonable efforts, but the consent has been refused or granted subject to a condition which the landlord cannot comply with, this exemption may apply.
• Devaluation – where a landlord has obtained a report prepared by a surveyor that states making the relevant energy-efficiency measures would reduce the market value of the property (or of the building of which it forms part) by more than 5%.
• Recently becoming a landlord – there is a temporary exemption of 6 months if you have recently become a landlord by purchasing commercial premises subject to existing tenancies, where the EPC is rated E or below. This temporary extension will allow for landlords to bring the properties up to the required standard within the 6 month period.

Save for the six month extension, the exemptions only last for around 5 years, so it is important to make note of the expiry date so you can review the situation again in time to avoid incurring any future penalties. Once the exemption expires, landlords must try again to improve the EPC rating to an E. If this is still not possible, landlords must register a further exemption which will need to include reasons why it was not possible to achieve an E rating. Is my property exempt from an EPC altogether? It should be noted that the existing EPC exemptions (meaning that an EPC certificate is not needed at all) still apply. As a reminder, these exemptions apply if you can demonstrate your building is:

• Listed or officially protected, and conforming to the MEES requirements would ‘unacceptably alter it’
• A temporary building used for 2 years or less
• A detached building where the total floor space is under 50m2
• Due to be demolished by the Seller or Landlord who hold all the relevant planning and building consents
• Vacant and – – due to be sold or rented out; or – suitable for demolition and the site could be redeveloped; or – if your buyer or tenant has applied for planning permission to demolish it.

The full list of exemptions can be found on the gov.uk website. I am a Commercial Property landlord – what should I do? In order to avoid any penalties, landlords should first check whether the EPC of their premises meets the minimum ‘E’ requirement. If it does not, and the Landlord is not eligible for any exemption, the Landlord needs to put in place the required works to bring up the EPC rating prior to April this year. If the Landlord thinks that an exemption does apply then it should register this on the PRS register, noting the expiry date of the exemption. What will happen in the future? Commercial Landlords should bear in mind (following a Government White Paper in December 2020) that it seems likely that the minimum EPC standard will be further raised to ‘C’ by 1 April 2027 and ‘B’ by April 2030. Who pays for any works that might be needed to the Property? Legally, the burden of bringing the property up compliant EPC standards falls on a landlord. However, in practice who actually pays for any such works will depend on the wording of the new or existing (as applicable) lease. Please contact our Landlord and Tenant team if you would like further advice on the following:

• On whether any costs of improvements are recoverable from an existing tenant
• How the Lease should be drafted (from either Landlord or Tenant perspective) to minimise your liability for any EPC remediation works costs

For legal advice on your commercial property regarding the new EPC regulations, contact us to speak to a member of our Real Estate team at Herrington Carmichael LLP.