Commercial Landlords; Are You Aware of the Upcoming Rule Changes That Could Affect You?

Fri 21 October 2022

Andrew Parker Commercial Surveyor Energy Performance Certificates, or EPCs, will not, or at least should not, be a new concept to anybody who has been involved in a property transaction in the last 15 years. They were initially introduced in 2007 and have been a legal requirement to accompany property being offered to the market, for sale or let, since January 2012. An EPC grades a property on its energy efficiency, from A-G, with an A rating being best and is usually accompanied by a recommendation report, detailing how the efficiency of the property could be improved. Since their introduction, this rating had a limited impact on a transaction, or at least it didn’t, until the rules changed.

The Minimum Energy Efficiency Standards (MEES) were introduced in March 2015 and adopted in April 2018. They set out to alter the way in which property, both commercial and residential, can be let, in a bid to improve the energy efficiency of existing property stock within England and Wales. This required any newly let property to have a minimum EPC rating of E, but tightened in April 2020 to include property with an existing tenancy, which is now also required to have the same. Whilst this initially only applied to the residential sector, as of April 2023, the commercial sector will also be required to conform.

It is also worth noting that the Government intend to increase this requirement yet further, stating that all non-domestic buildings should achieve a rating of B by 2030, which is a substantial increase from the current benchmark. They have also proposed the potential to have an interim milestone rating of C by 2027.

Although there are some exemptions to this, a large number of properties are likely to be affected and the responsibility for ensuring a property meets these new requirements falls on the shoulders of the Landlord. There are penalties are in place for non-compliance, which currently carry a maximum fine of £150,000 and some potentially rather large stumbling blocks, some of which are as follows:

First and foremost, the biggest issue could be one simply of cost. Whilst a cap of £3,500 (including VAT) is in place for improvements to residential premises, one is not currently in place for commercial. As a result, Landlords could be forced to spend substantial sums in order to achieve the magic E rating, without being able to recover costs from their tenant or see an increase in rent to reflect the improvements for some time. For those Landlords who simply don’t have funds in place to carry out the works, obtaining financing could also be difficult, particularly when coupled with the current economic climate.

Secondly, depending on the terms of the lease, the Landlord may not actually have the legal ability to enter the property in order to carry out the works. Whilst one would assume that most tenants will appreciate the circumstances, recognise the benefit to reduced running costs and provide access/accept some impact to their business, some may not. For instance, if the premises are used by vulnerable adults/children, provide medical care, contain a specialist or high-end fit-out, or store hazardous materials, the cost of relocating, removing or re-instating a feature could be costly and the tenant be within their rights to refuse access. This could result in legal recourse and give rise to larger issues/costs, as well as potentially damaging the relationship between tenant and landlord.

Finally, there is the potential for a knock-on impact on the value of the asset. It may be found that values of commercial premises with F or G EPC ratings, which are subject to requiring MEES compliant EPCs drop, particularly if the cost of works to improve the rating are high. This could, in turn, result in financial issues for matters such as accounts, pension fund capital or against secured lending.

Despite this, there are steps that can be taken, either through effective project management and cost sourcing, professional reporting and/or other strategic management. McCartneys have a range of professional and specialist members of staff who could be able to assist you, so, if you have any concerns surrounding this matter, please contact your local office and the most appropriate person will be in touch. Alternately, the Government have released guidance for landlords, which can be found on the gov.uk website.

Andrew Parker Andrew.parker@mccartneys.co.uk 01544 230 316 (3) / 07534 687 170