Update: EPC’s and commercial buildings

How will the new minimum energy standards affect my commercial lease?

From April 2018, the legal standard for minimum energy efficiency in commercial buildings will change.  In short, these changes would make it unlawful to let commercial properties with an EPC rating of F or G (the lowest two grades of energy efficiency).  The changes are likely to have significant impact on landlords of commercial leases, as set out below.

How the new rules will affect landlords

From 1st April 2018, landlords of buildings within the scope of the new regulations must not renew existing or grant new tenancies if the building has an EPC rating of Band F or G.  From 1 April 2023 landlords of buildings within the scope of the regulations must not continue to let buildings which have an EPC rating of Band F or G. It is important to establish, therefore, whether your building or tenancy is caught by the new regulations.

The regulations will not apply to:-

1. Industrial sites, workshops, agricultural buildings with low energy demand, certain listed buildings, temporary properties and holiday lets etc. which are not otherwise required to have an EPC;
2. Buildings where the EPC is over 10 years old or where there is no EPC;
3. Tenancies for a term of less than six months where there is no right of renewal;
4. Tenancies of over 99 years.

In addition, there are some exemptions when a building may still be let even if its energy rating is below the minimum standards, as explained below.

1. The consent exemption:  If within the preceding five years, a landlord has been unable to increase the energy rating to between bands Band E because of a tenant refusing to give its consent or a consent being granted subject to a condition which the landlord cannot reasonably comply with.

2. The devaluation:  If within the preceding five years, the landlord has not increased the EPC to between bands Band E because the landlord has attained a report from an independent surveyor which states that making the improvements would result in a reduction of more than 5% of the market value of the property or the building of which it forms part.

3. The temporary exemption:  If the landlord becomes landlord for a temporary basis i.e. no longer than six months, following the grant of a lease by an order of the court, deemed creation of a new lease by operation of law or a tenant’s insolvency etc.

Exemptions must be registered on the central Government PRS Exemptions Register in order to be relied upon.

If you do not fall within one of the exemptions, then the financial costs of upgrading the energy efficiency standards of commercial buildings and the loss of income if the property cannot be rented out could be quite substantial.  Financial penalties will also be imposed if landlords fail to comply with the new rules.

So, what steps should landlords take?  Landlords should prepare now by examining their property portfolios to understand which is the best way forward in the scope of the regulations and whether any exemptions may apply.  Landlords would also be advised to carry out up-to-date energy assessments and check the EPC ratings of their properties to ensure that these are correct.  Landlords should also review their leases to understand the relative rights and obligations imposed by any existing leases in respect of energy efficiency standards.

How do the new rules affect tenants?

Most commercial leases contain provisions which indicate that tenants are required to carry out repairs and maintain the property in line with statutory requirements.  It has been argued that such statutory compliance clauses would themselves not be enough to achieve an obligation on a tenant to carry out energy efficiency works. However, it would be prudent to carefully consider the wording of the provisions to clarify this and, in some cases, expressly exclude the Tenant’s liability for compliance.  Tenants should be particularly wary of any renewals under the Landlord and Tenant Act 1954 as they would be unable to vary the standard statutory obligations provisions without a landlord’s agreement on such renewals.

What next?

Some larger property companies and institutional landlords are in the process of altering the standard wording of their leases to ensure that they have sufficient right to restrict a tenant’s freedom to alter the property and increase the landlord’s rights to enter the property for reasons relating to energy efficiency.  However, other commentators consider that such moves are too premature and that landlords should wait to see whether there will be a revision to the government’s strategy on such matters in light Brexit.  It is possible that, the likely impact on small to medium enterprises and individual landlords will persuade the government to explore alternative options once it is not required to comply with the underlying EU law. However, at present there is no indication of the policy being repealed and so parties would be best placed to assume that the rules will apply from April 2018.

Butcher and Barlow LLP has a team of experienced commercial property solicitors who would be willing to assist any tenants in reviewing their existing leases and advising on any potential lease renewals.

For more information please contact Rebecca Jepson of Butcher & Barlow dedicated commercial office on 01606 334309 or email rjepson@butcher-barlow.co.uk