It's important for owners, buyers, landlords and tenants of commercial property to be aware of Government's ambitious programme to tackle climate change and reduce carbon emissions.
The EPC and MEES Regulations both seek to address issues relating to energy performance. However, the implementation of both sets of regulations often leads to confusion.
Here we’ll provide an overview of energy performance certificates and future requirements for commercial properties. We shall also explain green leases.
For tailored advice on how to prepare for these changes and ensure your lease agreements and other property contracts provide suitable provisions, please contact our friendly team of experienced commercial property solicitors.
Contents:
Energy performance certificates - what are they?
An energy performance certificate (EPC) is a certificate issued by an assessor, which shows information about the energy efficiency of the property to which it relates.
An EPC must contain the following information:
- The asset rating - the rating places the energy efficiency of the property on a sliding scale
- A recommendation report - the assessor usually must include recommendations for cost-effective improvements that could be made to the property to improve its energy efficiency
- Details of the property
- The date the EPC was issued
- Green Deal information - if the property is subject to a Green Deal plan that has not yet been repaid, then there will be an additional page to the EPC which sets out the information relating to that Green Deal plan. Since 2015, the Green Deal has been effectively closed to new entrants.
When do EPCs need to be provided?
An EPC may be relevant in the following situations:
- Where an existing property is being sold or rented out – it is considered that people will be influenced in their choice of property to buy or rent, by the property's energy performance rating. The seller or landlord must commission an EPC before the property is put on the market.
- Where a new property is built
- Significant alterations to an existing property
- Where a property is subject to a Green Deal plan
- For some properties, it is compulsory to display the EPC
Where a party has carried out work to a property which will improve its energy efficiency, they may want to show this to others (perhaps to demonstrate their Corporate Social Responsibility, or to encourage more interest in that property). Obtaining a new EPC will validate the improved rating.
The terms 'selling' or 'renting out' have not been defined in the EPC Regulations. Separate guidance indicates that lease renewals are not considered to be a sale or rent. Guidance conflicts on whether, if there is no valid EPC for a property, an EPC is needed on a lease renewal. The MEES Regulations prohibit the letting of sub-standard commercial properties following an extension or renewal of an existing tenancy on or after 1 April 2018. The more recent Non-domestic MEES Guidance note suggests that in the absence of a valid EPC, a new EPC would be required on renewal to a current tenant. The safest approach might be to obtain an EPC on a renewal if there isn’t a valid one in place. An EPC is valid for 10 years.
Some types of properties are exempt from the requirement to obtain an EPC.
How are EPC ratings calculated?
The asset rating of an EPC places the energy efficiency of the property on a sliding scale. It is done on a hypothetical basis, based on its method of construction, insulation, the services for heating or cooling it, and some standardised assumptions about how it will be used. The sliding scale of asset rating numbers is banded, using letters to indicate the bands from A to G, with A being the most efficient.
The rating is determined by calculating the building’s ‘carbon dioxide equivalent emissions’.
For commercial buildings, any systems that are expected to produce heating, mechanical ventilation, or air conditioning are included in the EPC assessment. This includes heating and cooling systems, power generation systems (if applicable) and refrigeration units.
Future EPC requirements – key dates
At present under the MEES Regulations, it is unlawful to grant a new lease of residential or commercial premises in England and Wales with an EPC rating of less than E.
If a landlord lets or continues to let a sub-standard property in breach of the Regulations, the lease will still be valid, but the landlord could be subject to some hefty fines. For commercial property, a breach of up to three months could result in a fine of up to £50,000 fine, and a breach of three months or more could result in a maximum fine of £150,000. The landlord in breach may also be published on a public register giving details of the breach.
There are a number of current exemptions, which if applicable, means that a landlord can let or, later, continue to let properties with an EPC rating of below an ‘E’ without having to carry out any energy efficiency improvement works. Exemptions are not automatic and require registration in advance on a government register. Exemptions need to be renewed at least every 5 years.
As part of the government’s target to reduce emissions to net-zero by 2050, from 1 April 2023, it will be unlawful to continue to let commercial properties with an EPC rating below an E. Effectively, all commercial properties will require an EPC.
The government is consulting on seeking to enforce that all commercial properties are to achieve a minimum energy efficiency of EPC band C, from 1st April 2027, rising to a minimum standard of EPC band B from 1st April 2030.
Green leases
Green leases include terms to manage energy efficiency and can cover the wider environmental impacts and sustainability of a building.
Where a landlord and tenant want to add green lease provisions to the lease, they will have a new, joint objective to minimise the environmental impact of the premises requiring a collaborative approach.
Introducing green lease clauses will impact on several different areas of the lease, including provisions relating to:
- service charge - allowing landlords to include the costs of improving the environmental performance of leased buildings in the service charge costs
- alterations – restricting the tenant from carrying out alterations which may have an adverse impact on the EPC rating or environmental performance of the building
- reinstatement at the end of the term – preventing the tenant from reinstating alterations where this would adversely affect environmental performance of the building.
A landlord might require a tenant to operate building management systems correctly, or some other technology.
The parties may agree to share their relevant data about the utilities consumption and waste generated by the occupation of the property. Without this it is impossible to plan strategies for improvement in environmental performance.
There may be an obligation that a tenant's fitting out works must not affect the energy efficiency standard of the building.
What should commercial landlords do to prepare for future requirements?
Commercial landlords need to be prepared as environmental regulations to improve EPC ratings come into effect over the coming years. You should act now to try to make your property compliant with MEES Regulations.
For a new lease it is important for you, as landlords, to consider whether to insist on certain requirements for a tenant at the heads of terms stage, so that your requirements are not then watered down when introduced and negotiated during the drafting stage.
Existing leases should be reviewed to check whether works can be carried out to improve the EPC rating and whether the costs of improvement can be passed to the tenant.
In the longer term with legislative changes putting more focus on environmental impact and sustainability, there will be an increased costs of complying with those changes on landlords and tenants. There are some schemes through government and local authorities to assist with more intended to be introduced.
