Energy regulation for commercial landlords: when EPC won’t let you be
By Fionnuala Reihill, Suzanne Nethaway and Daniel Moat
New rules on commercial property may require more landlords to invest in the energy efficiency of their holdings
Commercial property landlords must now comply with tough new rules on the energy performance of their buildings. Previously, they escaped many of the requirements imposed on residential landlords by regulations such as the Energy Performance of Buildings (Certificates and Inspections) (England and Wales) (Amendment No.2) Regulations 2008 (the “EPC Regulations”), and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “MEES Regulations”). However, since 1 April 2023, this has changed.
Most significantly, a landlord who owns a commercial property with an energy performance certificate (EPC) rating of F or G (and who is required under the EPC Regulations to obtain an EPC), must now seek to improve their rating. They will be required to increase their EPC rating to at least an E, unless they have registered a relevant exemption on the PRS Exemptions Register.
What the new rules require
The new rules have the potential to impact not only a broad range of commercial landlords, but also real estate investment vehicles and lenders that make advances against commercial properties. It’s vital that all those in scope of the regulations get to grips with the changing requirements.
Importantly, since 1 April 2018, the MEES Regulations have required commercial landlords to secure a minimum EPC rating of E on properties when they are required under the EPC Regulations to obtain a new EPC. The triggers that require landlords to obtain a new EPC include:
- The marketing of a property with no existing valid EPC;
- Advertising the property for sale or letting; and/or
- Making the property available to a prospective buyer or tenant, so that the landlord can provide a valid EPC for the property.
By contrast, the current guidance excludes the need for a new EPC when dealing with lease renewals to the same tenant, the sale of shares in a company which owns the property, or with the provision of living accommodation at a workplace, amongst others.
Five years after these requirements were introduced, an update to the MEES Regulations that came into effect on 1 April 2023 takes the requirements further. Pursuant to the revised MEES Regulations it is now an offence for a landlord to “continue to let” a commercial property that is required to have an EPC under the EPC regulations where that EPC is rated F or G, unless the property is exempt.
How much trouble could I be in?
Under the MEES Regulations, local authorities have powers to enforce them with penalties for failure to obtain or provide a valid EPC. These vary depending on the length of breach:
- for a breach of the MEES Regulations lasting less than three months, the local authority can fine the landlord the higher of £5,000 or 10% of the property’s rateable value up to a maximum of £50,000.
- for a breach exceeding three months, a landlord may receive a fine of the higher of £10,000 or 20% of the rateable value of the property up to a maximum of £150,000.
The local authority is also entitled to publish the details of the breach on the publicly accessible part of the PRS Exemptions Register, potentially resulting in adverse publicity for the landlord.
In search of exemptions
Remember, these penalties won’t apply if a property is exempt, such as in cases where the landlord grants a lease in excess of 99 years. Additional exemptions include:
- The “seven-year payback” test
- Lack of consent
- Devaluation
- All Improvements Made
The “seven-year payback” test
If the expected value of the savings arising as a result of the energy performance improvement works do not, over a period of seven years, equal or exceed the cost of implementation, the property will be exempt. To arrive at this conclusion, the cost of implementation – including the labour, equipment costs and any interest – must be compared against the value of the savings (as calculated using EPC software and relevant energy prices).
Lack of consent
Where a specified event has occurred in the previous five years, the owner of the property may be able to claim an exemption. These include cases where the tenant has refused to permit the landlord to carry out energy improvement works, or a third party has refused consent, or planning permission cannot be obtained for the energy efficiency improvement works. In such scenarios the exemption will last until the property is either disposed of by the owner, the lease is determined, works to improve the EPC rating are completed or five years have passed.
Devaluation
This applies where the landlord can show that an independent valuer has advised that the relevant improvements would reduce the market value of the property by more than 5% and the exemption is registered on the PRS Exemptions Register. Such an exemption will similarly last until the disposal of the property by the owner, the completion of works to improve the EPC rating, or for five years.
All Improvements Made
The prohibition on continuing to let a property that has an EPC rating of F or G does not apply where a landlord has made all relevant energy efficiency improvements that are possible, provided that the relevant information has been registered on the PRS Exemptions Register. However, this exemption only applies for five years. The assumption here is that this exemption is available solely based on a landlord completing all recommended energy performance improvements set out in the relevant EPC, though specific guidance on this point is lacking.
It is important to note that the “high-cost exemption” – an exemption from upgrading the EPC rating of a property to an E or higher where the cost of making the cheapest recommended improvement would exceed £3,500 – does not apply to commercial properties. However, there may be additional exemptions available subject to the facts and circumstances of each particular case.
How PwC can help
PwC’s Legal Real Estate team has a wide range of expertise including areas such as landlord and tenant advice, real estate finance, ESG and planning. Our team would be happy to discuss, and advise on, the interplay of these regulations with your property or property portfolio to investigate its application and the potential exemptions that you may be able to make use of. If this is something you would like to discuss further, please get in touch using the contact details below.
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