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.
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 has changed?
From 1 April 2023, the minimum 'E' requirement now applies to all "non-domestic private rented property" and so applies 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 is 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 did 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).
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.
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.
I am a Commercial Property tenant – how do I know if the Property has an F or G rating?
This will be available for inspection on the EPC provided by the landlord on the grant of the lease. You can alternatively find existing EPCs on the UK government portal – https://www.gov.uk/find-energy-certificate.
If the Property was rated F or G and no further improvement works have been carried out since the EPC was commissioned then the landlord is likely to be in breach of the new regulations.
If you believe that the EPC rating for the property might have changed since the start of the Lease or the commissioning of the EPC then you can potentially commission a new EPC.
Many landlords are now including 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). You will need to check the terms of your lease for any specific clauses or restrictions regarding the commissioning of an EPC.
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.
It may be possible for landlords to recover the costs of any improvement works through a service charge on the Property (if applicable). This will depend on if the lease provisions relating to service charge go further than general repair and maintenance costs.
If the service charge provisions within any existing lease's are wide enough, then the tenant can expect a potential increase in service charge costs to cover the costs of the required improvements.
Other considerations for Commercial Property tenants
Transfers or Underleases
If you are looking to get our of your existing lease either by selling your business or underletting to a third party then it is important to consider that you will be subject to the EPC regulations in your capacity as seller or Landlord of the underlease. You will need to consider the terms of your Lease to ascertain the best way forward. If works are required to bring the Property up to an 'E' rating then these may require the consent of the Landlord to be carried out. If the Landlord refuses consent then you could claim an exemption, however this must be registered before it can be relied upon.
If you are a tenant considering granting an underlease then you may want to consider taking appropriate legal advice as soon as possible to establish the next steps.
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.
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
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.
