EPC requirements for commercial tenancies

EPCs

Energy Performance Certificates (EPCs) are needed whenever a property is:

• built
• sold
• rented

An EPC gives a property an energy efficiency rating from A (most efficient) to G (least efficient) and is valid for 10 years.

Regulations

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations (the ‘PRS Regulations’) set a minimum energy efficiency standard (MEES) of EPC E for private rented properties. The requirement that a property must be EPC E has applied since 1 April 2018 to properties let on new tenancies (including renewals), and from 1 April 2023 will apply to all privately rented properties (even where there has been no change in tenancy).

Future Regulations

In October 2019 and June 2021 (consultation paper linked here), the Government consulted on proposals that would tighten the non-domestic MEES to set a long-term regulatory target of EPC B by 2030. To prevent a delayed response to the policy, it is proposed that there will be ‘incremental milestones’ in 2025 and 2027. Each milestone marks the start of a two year ‘compliance window’: 1 April 2025 – 31 March 2027 for an EPC C and 1 April 2028 – 31 March 2030 for an EPC B.

Enforcement

Currently, local authorities may issue financial penalties up to a maximum total of £5,000 (and a publication penalty) on a landlord of a non-domestic PRS property in relation to registering false or misleading information, or against a landlord who has failed to act on a compliance notice.

Landlords remain liable to a maximum fine up to £150,000 if a property has been let in breach of the PRS Regulations.

Exemptions

• ‘7 Year Payback’ Exemption– If the capital required to improve the rating to an E or above is not cost-effective within a seven-year payback period. The consultation states that the government is seeking to simplify the process for this.
• ‘Consent’ Exemption– Where despite reasonable endeavours, the necessary third-party consent (e.g., a local authority, tenant, or superior landlord) has been refused or given with conditions with which the landlord cannot reasonably comply.
• ‘All Improvements Made’ Exemption– Where all the “relevant energy efficiency improvements” for the property have been made (or there are none that can be made) and the property remains sub-standard.
• ‘Wall Insulation’ Exemption– The regulations acknowledge that certain wall insulation systems may not be suitable in certain situations.
• ‘Devaluation’ Exemption– Where an independent surveyor determines that the relevant energy efficiency improvements to be made to the property are likely to reduce the market value of the property by more than 5%.
• ‘New Landlord’ Exemption– Recently/suddenly becoming a landlord (a temporary six-month exemption).

Where an exemption applies, the exemption must be registered by the landlord (or an agent for the landlord) before it can be relied on; this registration is made on a self-certification basis and an exemption will apply from the point at which it is registered. All exemptions are valid for a period of 5 years, except for temporary exemptions. The Government proposes that all properties must review their existing exemptions at the start of each compliance window. Landlords would have to ensure that any valid exemptions registered are still relevant in 2027, and in 2030, providing updated evidence as required.

LTA 1954

A Landlord cannot refuse to renew a lease on the basis that works will need to be carried out to meet the MEES. Improvements will need to be made unless there is an exemption. Consent to do the necessary works may be required from the current tenant of the property or other tenants depending on the provisions of the tenancy or tenancies. However, tenants may wish to withhold consent for reasons such as unacceptable business interruption. In this case, the landlord might want to rely on the ‘Consent’ Exemption, stating improvements cannot be made because consent could not be obtained from the current tenant of the property. The exemption will only remain valid for as long as that tenant remains the tenant.

It should be noted that, under the Energy Performance of Buildings (England and Wales) Regulations 2012/3118, there is a duty to:

• Co-operate with the landlord to allow the landlord to comply with the duty to prepare an EPC and recommendation report.
• Allow an energy assessor access where it is reasonably necessary for the purposes of preparing an EPC and recommendation report.

How to prepare

• Review properties to ascertain if they fall below the proposed new minimum threshold.
• Consider lease term and whether the 2027 and 2030 milestone ratings will need to be adhered to during the term.
• Include energy efficient modifications in any planned maintenance for properties with a rating of F or G (to ensure a minimum rating of E). It should also be considered that properties currently holding a rating of E could be at risk of falling into an F or G.
• Consult and engage with occupiers in respect of any proposed works and associated costs.