Changes to commercial EPCs having drastic effects

Minimum Energy Efficiency Standards (MEES) requirements and Energy Performance Certificates (EPC) rules

All landlords, investors, developers, and tenants must be aware of the upcoming changes to MEES and EPC requirements, as there are severe penalties for a party who has not taken the necessary steps to comply by the deadline.

Commercial properties

The current position is that a tenancy cannot be granted to new or existing tenants if the property has an EPC rating of F or G, unless the property is registered on the PRS Exemptions Register.

However, from 1 April 2023, it will be an offence to continue to let or rent out a property if it does not have a rating of at least E. The penalty is based on the rateable value of the property and will be between £10,000 – £150,000 per breach. Details of the breach may also be made publicly available.

It has been indicated that these requirements will tighten again in the near future, with a proposal that commercial properties must have an EPC rating of C or higher by 1 April 2027, and B or better by 2030.

Residential properties

The requirement for the EPC rating to be E or higher has already been in place since 1 April 2020. Under current government proposals, in 2025 this will be upgraded to a requirement for the rating to be C or higher for any new lettings, and in 2028 it will also apply to any continuing tenancies.

The law and the first court decisions around the topic make it clear that the obligation to comply with the legislation rests with the landlord and is not to be delegated to the tenant, although it may be that the costs are recoverable from the service charge in some cases.

Investors, developers, and landlords must consider factors such as the cost of upgrading works; the loss of income if a property can no longer be rented out because the works have not been done; and the level of the fine if the requirements are not met. Portfolios should therefore be reviewed and EPCs obtained if they are not already in place. Where works are required, they should be considered, and if third party consents or exemptions apply, then applications to obtain these or to be entered on the register of exemptions should be made.

Experts and contractors may well be booked up with the approaching deadline, and so this should be done sooner rather than later, as leaving it to the last minute could prove expensive.

This will clearly be extremely important for all those with an interest in property, as it could affect the availability of a property for letting, and the rent/purchase price valuations.

Owners of properties that do not have an EPC rating of A to E will need to carry out sufficient works to improve the rating before 1 April 2023, or else to register a valid exemption if available. Otherwise, it will be an offence to continue to let the property without having done so.

Property owners will therefore need to be able to show that:

• there is an appropriate EPC rating in place; or
• all the ‘relevant energy efficiency improvements’ that can be made have already been made, or that there are no such improvements to make; or
• that there is a valid exemption.

There are various exemptions which may be applied for both commercial and residential properties, as listed below:

Consent

If one of the below has happened during the previous five years, the owner may be able to claim an exemption:

• a tenant has refused to permit the landlord to carry out the works, where this is required
• an occupier of the same building has refused to consent to the works
• a third party whose consent is required has refused consent or has attached onerous conditions to that consent with which the owner could not reasonably comply
• a lender with a charge over the property has refused to consent to the works
• the local planning authority has not given planning permission where this is required
• a party such as English Heritage has not given permission where this is required.

This exemption will last until the earliest of the following events:

• the disposal of the property by the owner, at which point the new owner will have to decide whether to apply for a fresh exemption
• the determination of the lease held by the tenant who refused consent (note that the law is unclear on renewals to the same tenant or assignments of the lease, and so legal advice should be sought in these situations)
• although not stated expressly in the guidance, by the same logic, the determination of any third party right where that third party has withheld consent, in these circumstances it would be prudent to seek legal advice
• the expiry of five years, although again the date on which the five-year period commenced may be arguable, and so legal advice should be sought
• the completion of works to improve the EPC rating so that the building is compliant.

Devaluation

If both of the following apply during the previous five years, the owner may be able to claim an exemption:

• the landlord has obtained an independent valuation which advises that making the relevant improvements would reduce the market value of the property, or of the building where the property is situated, by more than 5%; and
• the exemption has been registered correctly on the PRS Exemptions Register.

This exemption will last until the earlier of the following:

• the disposal of the property by the owner, at which point the new owner will have to decide whether to apply for a fresh exemption
• five years- although as above it is not wholly clear from the guidance when this period commences, and so the property owner should take advice on this
• the date on which works are completed so that the property is no longer non-compliant.

Short-Term Letting Exception

In certain circumstances, a landlord is given six months to comply with the prohibition on letting sub-standard property so that it has time to assess and complete the works, or to apply for a longer-term exemption. However, this only applies where there is an existing tenancy; it does not apply to new lettings.

A temporary exemption can be claimed where the landlord has registered the prescribed information on the PRS Exemptions Register and where one of the following circumstances applies:

• where the grant of the lease is due to a contractual obligation
• the insolvency of the tenant, where the landlord was the tenant’s guarantor
• where the landlord has exercised its right as guarantor or former tenant to take an overriding lease under 19 Landlord and Tenant (Covenants) Act 1995
• the deemed grant of a new lease by operation of law
• the grant of a lease by order of the court.

This exemption will last until six months after whichever is the later of:

• the date on which the landlord became the landlord by virtue of one of the above; or
• the date on which a new lease has been granted by a court order other than under the Landlord and Tenant Act 1954.

All improvements have been made/there are no improvements to make

The prohibition on letting or continuing to let will not apply if the landlord has made all the relevant energy efficiency improvements that can be made, provided that:

• the landlord has registered the appropriate information about this on the PRS Exemptions Register; and
• no more than five years has expired- as above, advice should be sought on when this period commenced and will expire.

This exemption will last until the earlier of the following:

• the disposal of the property by the owner, at which point the new owner will have to decide whether to apply for a fresh exemption
• the date on which improvement works are completed so that the property meets the standards.

Solid Wall Insulation

• If the property contains a certain type of cavity or other wall insulation, there may be an exemption. At present this only applies to residential properties, for the same period as where the works have been done or there are no works to do.

If you require advice about anything to do with EPCs contact us anytime, or if you require an EPC, you can Book your EPC here.