EPC regulation changes and the impact on commercial property – including dealership property
11 May 2023
According to new research from Market Financial Solutions (MFS), more than two fifths of UK landlords are still not familiar with changes to EPC regulations. Here is a brief summary of the recent changes, and the impact for landlords of commercial property – including a dealership property.
What is the current position for commercial property?
When selling or leasing a commercial property – including a dealership property – the seller or the landlord is obliged by law to have or obtain an Energy Performance Certificate (EPC). This is a certificate issued by an energy assessor which sets out the energy efficiency of the property on a rating scale of A-G and is usually accompanied by a recommendation report which suggests ways to improve the rating. There are some exemptions to this rule (for example, listed buildings) so the requirements should be checked carefully before the property is marketed.
The MEES Regulations (The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015) deal with Minimum Energy Standards and apply only to properties which are required to have an EPC.
Up until 1st April 2023, under the MEES Regulations, it has been unlawful to grant a lease of a property with an EPC rating of F or G unless the landlord can use one of the exemptions set out in the MEES Regulations. For example, the “Reduction on market value” exemption which would apply if the suggested energy improvement works would reduce the market value of the property by more than 5%. If a landlord wishes to apply an exemption, it must be registered on the PRS exemption register and it generally needs to be renewed at least every five years.
What are the changes from 1st April 2023?
From 1st April 2023, it also became unlawful for landlords to continue to let commercial property with an F or G rating, even if the Lease was granted prior to the MEES Regulations coming into force. If the landlord fails to comply with this, it will be in breach of the regulations and liable for penalties of up to £150,000 which are enforced by Trading Standards. The breach will also be published on a public register.
What should a landlord do?
A landlord should ensure that it has a valid EPC for all their properties which are obliged to have EPCs, and that such EPC has a rating of E and above. If it does not, a landlord should take steps to either improve the EPC rating or register an exemption. If an existing lease does not grant the landlord sufficient rights to enable it to carry out improvements, this may constitute an exemption but again, this must be checked carefully.
A landlord may also want to consider taking the following steps:
- Review the terms of any existing leases to establish whether any costs of improving or meeting the EPC rating can be recovered from the tenant.
- Include a provision in the lease to allow the landlord to recover costs of improving or meeting the EPC rating. This may be recoverable by way of service charge costs.
- Impose restrictions on the tenant from carrying out any works or alterations to the property that could have an adverse impact on its EPC rating.
- Include a provision in the lease that prevents any reinstatement of the property by the tenant where it may or would adversely affect its EPC rating.
It is recommended that landlords should consider EPC requirements at the heads of terms stage.
Under current government plans, a minimum C rating is likely to be needed by 2027 and a minimum B is likely to be required by 2030. These changes are not yet laid down by statute, but the Government has consulted on the proposed changes. If they do come into force, it is likely that evidence of compliance or a registered exemption will need to be in place by these dates so landlords will need to start thinking about future-proofing their property as soon as possible, and well in advance of these dates.
Aside from these implications for landlords, the rules surrounding EPCs also impacts on tenants and lenders. If you would like advice on any aspect of this, please contact us.
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 May 2023.