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Advice for Commercial Landlords on New Energy Efficiency Standards

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In less than 10 months, private sector landlords of commercial properties will be prohibited from granting new leases on buildings with energy performance certificate (EPC) ratings of F and G. But warns commercial property consultants, Lambert Smith Hampton (LSH), the new regulations could also downgrade D and E-rated properties and so place them at risk.

So what can landlords do to prepare for the Minimum Energy Efficiency Standards (MEES) and what are the key points surrounding the new regulations?

What are the MEES Regulations?

MEES came into force in 2016 under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.

From 1 April 2018 landlords of non-domestic private rented property are prohibited from granting a new lease of any “sub-standard” properties (ie those that have an EPC rating below E). And from 1 April 2023, these requirements will also apply to all existing lettings.

There are a number of exclusions and exemptions that will enable a landlord to let, or continue to let, a sub-standard property. These include leases of less than six months or more than 99 years, and properties where an EPC is not required. Whatever the reason, if a landlord wishes to register an exemption they must do so by 1 April 2018 otherwise those in breach could be subject to a publication and/or financial penalty.

Why are 65 per cent of properties at risk?

Collectively around 65 per cent of properties in England and Wales are at risk. That’s because 18 per cent are F and G-registered and the 47 per cent that are D and E-rated should not be considered “safe” as they may be downgraded to F and G ratings. It seems improvements in efficiencies are a key factor – the process of EPC assessment is now far more accurate and detailed since its introduction in 2008. Similarly, revisions to Building Regulations in relation to the efficiency requirements of buildings have also enhanced significantly.

MEES – is it a tenant’s advantage?

An EPC is valid for 10 years if a property has remained largely unaltered during that time. Usually, however, there is nothing stopping a tenant from having a new EPC carried out and registered, which will supersede a landlord’s existing EPC. This could cause a fundamental shift in the relative bargaining position of landlord and tenant.

What should landlords be doing now?

The MEES Regulations could significantly alter the landlord and tenant balance depending on the property and lease event. The risk potential of a given property can only be judged individually taking into account the validity of the existing EPC, the risk profile of the property failing the MEES regulations, the ability to recoup upgrade costs from the tenant, and the applicable exemptions, if any.

While there could be a temptation to commission wholesale renewal of all EPCs across portfolios this could result in the downgrading of a property in circumstances where it could have been lawfully let for the foreseeable future.

There also needs to be a clear focus on lease drafting. The ability of landlords and tenants to protect themselves through careful drafting will be important to regulate the impact of the MEES Regulations on the relationship and avoid contentious situations.