Energy Performance Certificates & Commercial Leases – Changes Are Coming

Current law

The Minimum Energy Efficiency Standards (MEES) Regulations have been in place since 2018. They currently mean that it is unlawful to grant a lease of most property unless the property has an Energy Performance Certificate with a rating “E” or better unless the landlord registers an exemption.

There are a number of exemptions available including:
• High cost exemption – (For residential property only) where the cheapest recommendations cost more than £3,500.
• 7 year payback exemption – (For non-residential property only) where the cost of improvements exceeds the expected savings to be made within 7 years.
• All improvements made exemption – where all the relevant improvements have been made and the property remains below EPC “E” rating.
• Consent exemption – where a third party consent is need to carry out the improvement but cannot be obtained.
• New landlord exemption – a temporary exemption available to new landlords in some circumstances.

From April 2023 these regulations will extend to all existing leases making it unlawful to continue to let them unless the property has an EPC rating of “E” or better or the landlord has registered an exemption.

Future planning

The government has indicated that it aims to raise the minimum EPC level from “E” rating to “B” rating by 2030 in line with its environmental goals. This is an important way in which the property sector can contribute towards achieving a net zero carbon economy. While there are cutting edge properties that are already carbon neutral (like the GSK Laboratory University of Nottingham Science Park ) there are many that are not.

The current expectation is for the minimum level to be raised to “C” rating in 2027 to allow this target to be achieved in a stepped approach.

We are now less than two years away from the MEES regulations applying to existing leases and given the average length of lease for commercial property is around 6 years many leases granted now will end after the minimum threshold has been raised.

What does this mean for me?

Many leases include obligations to carry out works required by statute. The wording of these clauses varies and whether this would require a tenant to carry out EPC improvement works will depend on exactly how your lease is drafted.

Clearly, energy efficiency improvements benefit both tenants (who then have lower energy costs) and landlords (as the underlying value of their investment rises). However, it is important for both sides to engage proactively on this subject to ensure that a fair balance between who will pay for the improvements, how and when they will be carried out, and how the benefit of those improvements will be split between the various interests.

How can we help?

We act for both landlords and tenants and can advise on the wording of leases to ensure that your position in relation to these improvements is not compromised. We can also help you to engage proactively with your landlord / tenant including agreeing variations that might be necessary to your lease or making court applications to protect you from bearing all the costs and gaining none of the benefits.

For more information or to speak to a member of our Commercial Property Team call 0800 088 6004.