It is important that commercial property investors, including charities, understand the impact of the regulations on their property holdings and dealings with tenants.
EPCs have been a feature of commercial property transactions since 2008, required when a property larger than 50m2, with fixed services for heating/cooling is built, sold or let. Until MEES many prospective buyers and tenants were not too interested in the EPC rating and no one had really heard of enforcement action (relatively modest fines) ever being taken.
As a result of MEES, in force from 2018, it is now unlawful to let a ‘sub-standard’ property – that is, one with an EPC rating below 'E'. From April 2023 it will become unlawful for a landlord to 'continue' to let a sub-standard property. Where a sub-standard property is to be rented out then either improvement works must be carried out so that the property attains the minimum standard of a least 'E', or an exemption must be claimed.
No one knows exactly how many sub-standard properties there are but estimates are that the figure for offices is approximately 23%. It seems likely that the minimum standard might be raised in the future. There are some differences in the rules for residential, as opposed to commercial properties. This article is intended to only be an overview of the EPC/MEES regime as it applies to commercial properties.
What are Energy Performance Certificates?
An EPC is prepared by an EPC assessor and rates the energy efficiency of a property on a scale of ‘A’ to ‘G’. The rating is similar to the ratings produced for electrical items, with ‘A’ being the most energy efficient.
EPCs which already exist are publicly available on the EPC register online and it is possible to download a copy, together with the accompanying Recommendation Report, which will outline the steps which could be taken to further improve the energy efficiency of the property. Some recommendations may be as simple as changing the light bulbs to energy efficient models, but some may require significant financial outlay, such as new heating systems or double-glazing.
EPCs are usually valid for 10 years from the date of issue. Owners of some larger public buildings, for example, colleges and museums, are required to display the EPC on the premises.
Which properties/transactions are exempt from the requirement to obtain an EPC?
Some properties are exempt from the requirement to obtain an EPC and examples include:
- a temporary building which is only going to be used for two years or less
- buildings used as a place of worship or for other religious activities
- an industrial site, workshop or non-residential agricultural building that doesn’t use much energy
- a detached building with a total floor space under 50m2 or
- a building which is due to be demolished and all necessary consents for this exist, such as planning.
There are also some transactions which are currently exempt from the requirement to provide an EPC, for example the grant of a renewal lease, a lease extension, a lease surrender and ‘not-for-value’ transactions, although the guidance on how some of these exemptions apply is not terribly clear.
Exceptions from the requirement to attain the Minimum Energy Efficiency Standard
There are some circumstances in which a sub-standard property can nevertheless still be let and these include:
- leases of less than six months
- leases of more than 99 years
- lettings of properties where an EPC is not required – because, logically, the MEES is only engaged where there is an EPC.
Key exemptions from the requirement to attain the Minimum Energy Efficiency Standard
The regulations recognise that some energy improvement works are not reasonably possible, due to the cost or practical considerations and so exemptions (which usually only last up to five years) include:
- the ‘seven-year payback exemption’ – where the capital cost of the work involved will not pay for itself within seven years
- where third party consents required are not forthcoming, for example a landlord's or tenant’s consent, despite reasonable endeavours to obtain the consent
- where the measures would depress the value of the property by 5% or more.
In order to claim an exemption it is necessary to log an entry on the Exemptions Register online. This is a centralised register which is public information. Some landlords may therefore prefer to make the improvement works rather than have their property appear on the register.
Further guidance on the exemptions and how to register an exemption is available on the Government website.
EPCs, MEES and listed buildings
There is a lot of confusion about how the regulations apply to listed buildings. The fact that a property is listed does not automatically exempt the property from the requirement to satisfy MEES, or have an EPC certificate. However, it may be that an exemption is available because the carrying out of energy efficiency improvement works would adversely impact the heritage value of the property, not be cost-effective, or be refused listed building consent. If an exemption is being claimed then it is necessary to register it.
What are the consequences of failing to comply?
Unlike the regime for enforcement of the obligation to provide an EPC, under which Trading Standards officers can levy fines of between £500 to £5,000 (based on the rateable value), the penalties under the MEES regime are much more substantial. Depending on the type of breach, and the value of the property concerned, the fines can be as high as £150,000. In addition, the enforcement authority can impose a publication penalty, in addition to, or instead of, a financial penalty. This means that some details of the breach, including the landlord’s name and any penalties levied, could be put on the public part of the PRS Exemptions Register. This could risk bringing the organisation into disrepute and/or ‘blight’ the property involved. Charity trustees should therefore be aware of their obligations and ensure their charity is compliant.
In the years to come, it is likely that EPCs and the MEES will become a more pressing issue, as the bar for the minimum standard rises. It is important for charity landlords to factor energy performance of buildings into their property strategy. Sub-standard properties may require costly improvements to bring them up to minimum standard or become an administrative burden in terms of logging and keeping track of exemptions.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at October 2020.