Final call to prepare for tightened energy efficiency rules for UK commercial property
Published on 28th Feb 2023
Landlords have one month to comply before sub-standard EPC ratings become unlawful for existing lettings from April 2023
There is one month until the Minimum Energy Efficiency Standards (MEES) regulations tighten, as from 1 April 2023 it becomes unlawful for a landlord to continue to let a sub-standard commercial property.
A sub-standard property is one with an Energy Performance Certificate (EPC) of F or G. Landlords may escape penalty if they hold a valid exemption which is registered on the Private Rented Sector (PRS) Exemptions Register.
The tightened MEES Regulations apply to all non-domestic private rented properties (which are distinct from the MEES obligations which apply to domestic properties let under assured or regulated tenancies) and which are legally required to have an EPC. However, they do not apply to tenancies of over 99 years or of less than six months (with no option for renewal).
Action for landlords to take
To prevent any financial or reputational exposure, landlords should ensure they are ready ahead of the deadline by checking the EPC of their premises (considering both the rating and whether a new assessment is required), and register any available exemptions (most expire after five years).
Landlords should also consider the advantages and disadvantages of making cost-effective improvements to meet the requirements from 1 April 2023, or of making more substantial improvements to meet the requirements that are forecast to follow in 2027 (an EPC of C or above) and 2030 (an EPC of B or above). They may be able to recover costs of improvements through the service charge provisions of the lease.
The grant of any new leases should include sufficient access rights provisions that enable landlords readily to comply with MEES requirements.
Impact on landlord and tenant matters
In addition to matters previously explored in our Insight, there are considerations that landlords should be aware of which may affect the landlord/tenant relationship, in light of the requirement for improvement in standards.
Landlords should note that a property is not necessarily in breach of the compliance with statutory requirements clause if the property holds a sub-standard EPC rating.
In respect of rent review, standard leases usually include the assumption that the premises can be lawfully let, which means any negative effect on the impact of rental value of the lease being unlawful under MEES is disregarded.
Regarding dilapidations claims, landlords should be aware of the impact of sub-standard ratings in terms of supersession. This means that a landlord may not be able to recover any damages in respect of repairs that would be rendered obsolete by a landlord's proposal to carry out alterations or demolition to the property at the end or shortly after the end of the lease term.
Appeal to investors and tenants
While a landlord may not currently be liable under MEES regulations in respect of a current lease of the premises, it may well become liable in respect of the forecast tightening in 2027 and 2030 under a subsequent lease.
There may be a practical benefit in bringing properties up to code at the soonest moment, as the advantage increases for early movers of rental and price premium in comparison to those that implement standards later.
There is clear benefit to the value of an asset with improved energy performance and sustainability, so landlords should not let bringing the premises up to code fall down their list of priorities. An asset with a high sustainability record will be in demand and more attractive to potential investors, given prevailing environmental attitudes.
Beyond the obvious, that an increase in energy efficiency and therefore a correlating decrease in energy consumption reduces costs and increases value, buildings that have higher standards (in an energy efficiency sense) are more likely to be better equipped and modern, and are likely to be more attractive to investors and tenants beyond their environmental benefits.
There is also a premium that can be obtained from tenants when renting premises that align with their company ethos, which is now very likely to be sustainability- and decarbonisation-focused. Environmentally-friendly buildings have been shown to benefit from valuation, rental premium and increased tenant occupancy.
Osborne Clarke comment
Landlords should ensure that they do not miss the opportunity to bring their premises up to standard (or beyond the standard), whether or not they are liable under the upcoming deadline.
The potential benefits of adding value and long term sustainability, in both an economic and environmental sense, are too great to ignore.