If you own or manage commercial property in the UK, your building’s energy performance will likely come up at some point. While it has been mandatory for all rented properties to have a valid EPC since 2008, the rules and requirements surrounding energy performance certificates have changed significantly in recent years. In particular, the Minimum Energy Efficiency Standards (MEES) Regulations 2015 transformed the energy performance landscape. This is part of the steps being taken by the government as it rolls out its ambitious programme to tackle climate change and reduce carbon emissions. A key feature of this is a requirement that commercial properties falling under the remit of the Regulations meet minimum efficiency standards.
With all the developments and planned changes, many landlords, business owners and developers have been left feeling uncertain about what they should be doing, and when, to comply with the rules.
In this article, our knowledgeable commercial property lawyers provide an up-to-date overview of energy performance certificates to bring you some clarity. For tailored advice on how to comply with EPC regulations depending on your particular circumstances and what you intend to do with your business premises, please contact us.
Contents:
- Energy performance certificates - what are they?
- When do EPCs need to be provided?
- How are EPC ratings calculated?
- What do commercial landlords need to know about EPCs – current requirements
- What are the exemptions?:
- Penalties for non-compliance
- Future EPC requirements – key dates
- Green leases
- What should commercial landlords do to prepare for future requirements?
- Summary
Energy performance certificates - what are they?
Energy performance certificates are key documents that rate the energy efficiency of your building on a sliding scale. If you own business premises in the UK, it is important to familiarise yourself with the requirements and deadlines surrounding EPCs to avoid fines and disputes. Good energy ratings can also boost the attractiveness to prospective buyers or tenants due to the potential cost savings and environmental benefits.
EPCs are prepared and issued by qualified EPC assessors who analyse the building’s core design, dimensions and systems (heating, cooling, ventilation, lighting, insulation), energy consumption and emissions to calculate a score.
You may recall the EPC rating of your property being displayed on marketing materials when you first purchased your commercial property. If you haven’t sold or leased it, or made any significant alterations, you may not have had any dealings with EPCs since ( eg you are an owner occupier). That said, commercial property owners and managers are increasingly interested in improving / upgrading the energy performance of their buildings as part of demonstrating corporate social responsibility / a commitment to the environment.
When do EPCs need to be provided?
You must consider obtaining an EPC if your property plans involve any of the following:
- Where an existing property is being sold or rented out as the seller or landlord you must commission an EPC before the property is put on the market. The responsibility in this regard shifts to the current tenant if they are assigning a lease.
- Where a new property is built, you must obtain an EPC after construction works are finished.
- Where you have made significant alterations to an existing property particularly those that affect its heating, air conditioning, or mechanical ventilation systems.
- Where a property is subject to a Green Deal plan
- For some properties, it is compulsory to display the EPC, namely:
- For larger commercial premises with a total useful floor area of over 500sqm that are frequently visited by the public, such as shopping centres, and an EPC has already been produced for the building.
- The EPC rating must be in any marketing materials when selling or leasing a property to prospective buyers or tenants, ensuring they are aware of the energy performance of the property.
The MEES Regulations do not apply to some properties, namely:
- Temporary structures used for 2 years or less
- Listed or officially protected buildings that need significant altering to meet EPC requirements unacceptable to their character and appearance
- Places of worship or other religious activities
- Industrial sites, workshops or non-residential agricultural properties with low energy usage
- Buildings set to be demolished with all the relevant planning consents in place
- Standalone buildings with less than 50sqm total floor space
- Vacant premises with no intention let
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.
What do commercial landlords need to know about EPCs – current requirements
Unless a valid exemption is registered, commercial properties (ie non-domestic private rented properties) that are legally required to hold an EPC must have a rating of E or above in order to:
- Grant a new lease of the commercial premises
- Extend or renew the lease of an existing tenancy
- Continue to let or sublet the property, even when there has been no change in tenant or circumstances
The rules around grant, extension and renewal of leases came into effect in 2018, which were then extended to existing leases 5 years later. Effectively, since April 2023 all commercial property that fall within the remit of the Regulations rated F or G are substandard. This inevitably has led to landlords taking steps to improve/upgrade their properties to comply with the Regulations. This is the case even with existing leases let to the same tenants where nothing has happened as such to prompt you to obtain an EPC eg sale or reletting. It is apparent how landlords/owners/managers of commercial property can therefore inadvertently find themselves in breach, which emphasises the importance of keeping up to date with these developments.
What are the exemptions?:
There are a number of current exemptions, which if applicable, means that you can let a commercial property 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. You also do not need to commission an EPC on a property that you are not selling, letting, or significantly altering where an existing EPC has expired.
The key exemptions available are:
- Seven year payback exemption: If the cost of improving the property to meet the minimum energy efficiency standards would take longer than seven years to pay back through energy savings, landlords can claim this exemption.
- All improvements made exemption: If you have made all possible energy-efficient improvements but the property still doesn't meet the required EPC rating, you may qualify for this exemption.
- Wall insulation exemption: Properties that cannot have wall insulation installed due to structural issues or if it is not cost-effective can be exempted from the energy efficiency requirements.
- Third-Party Consent Issues: If you are unable to obtain the necessary consent from a third party (such as a tenant, superior landlord, or mortgagee) to carry out improvements, you can claim this exemption.
- Property devaluation: If making the improvements would lower the property's value by more than 5%, you may be exempt from meeting the EPC requirements.
- New landlords: If you have recently become a landlord, eg because you acquired a tenanted commercial property, under some circumstances you can claim a temporary exemption. This lasts for a period of six months after taking on a new property, allowing you time to assess and make improvements.
Penalties for non-compliance
If you let or continue to let a sub-standard property in breach of the Regulations, the lease will still be valid, butyou could be subject to some hefty fines. Financial penalties are imposed according to the rateable value of the property:
- A breach of up to three months carries a penalty the greater of £5,000 or 10% of the property’s rateable value up to a maximum fine of £50,000.
- The penalty increases to 20% of the rateable value for a breach of three months or more with a minimum fine of £10,000 up to a maximum of £150,000.
Landlords in breach may also be published on a public register giving details of the breach, which could damage your reputation.
Future EPC requirements – key dates
As part of the government’s continued efforts to enhance energy efficiency across the built environment and achieve net zero by 2050, we will continue to see the gradual tightening of standards as follows:
- From April 1, 2027, commercial properties will be required to have a minimum EPC rating of C. This change marks an increase from the current minimum of E.
- By April 1, 2030, the minimum rating will be raised further to B rating.
Landlords and property owners must prepare for these transitions to avoid unlawful lettings in breach of EPC laws. Steps you can take include assessing your property’s current EPC rating and implementing necessary improvements to ensure compliance before the 2027 deadline.
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 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 the 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 continue 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.
Summary
EPCs are a vital aspect of commercial property management in the UK. Understanding when an EPC is needed, when it must be displayed, the exemptions that apply, and the penalties for non-compliance is crucial for landlords and property owners. By ensuring compliance with EPC regulations, not only can you avoid fines but also contribute to a more energy-efficient and sustainable future. If you have any queries or concerns surrounding EPCs, our friendly team of commercial property solicitors are on hand to help.
