In April 2023, new regulations were introduced regarding the Energy Performance Certificate (EPC) for commercial properties. Landlords are now restricted from leasing properties with EPC ratings of F or G, with potential penalties for non-compliance.
Future goals have been set with properties expected to achieve a ‘B’ rating by 2030. These changes bring both challenges and opportunities for landlords.
In this article, we explore these changes and the opportunities they present.
What EPC changes were made in 2023?
From 1st April 2023, it became unlawful for landlords to let commercial property with an EPC rating of F or G, even if the lease was granted prior to the new regulations coming into force.
Non-compliance does not invalidate a lease, but the landlord will be exposed to potential charges of up to £150,000. The exact amount will depend on the extent of the delay in complying with the regulations and the rateable value of the premises.
What will future EPC regulations look like for landlords?
It is anticipated that by 2030 landlords will be obligated to achieve at least a ‘B’ rating for their property. This transition is expected to be gradual, with an intermediate target of a ‘C’ rating by 2027.
What are the EPC exemptions for a commercial landlord?
The Minimum Energy Efficiency Standard (MEES) regulations contain exemptions that may be relied upon by a landlord to avoid enforcement penalties. To benefit from an exemption from the regulations the conditions of the exemption must be met. If successful the exemption will last for five years, with the exception of exemptions for new landlords which will last for six months.
The most commonly used exemptions are (but not limited to):
Consent: The landlord has been unable to improve the EPC rating because they have not been given consent by a tenant, a superior landlord, a lender or other third parties despite reasonable efforts to obtain this.
Devaluation: The landlord has received a report from a surveyor stating that making such improvements will result in a reduction of more than 5% in market value of the property.
Use of landlord break clauses for EPC works
Break clauses in commercial leases offer landlords the flexibility to end a lease before its end date under specific conditions. In light of the new and upcoming EPC regulations, landlords may find a break clause beneficial.
Here are three ways a commercial landlord can benefit from a break clause:
Retrofitting disruptions: With the push towards higher EPC ratings, landlords may need to conduct extensive retrofits or upgrades to their properties. A break clause can provide landlords the opportunity to regain possession of the property, carry out the necessary works without tenant interference, and then re-let it.
Higher rental yields: Following the necessary upgrades, properties with improved EPC ratings might command higher rents in the market, given the increasing demand for energy-efficient commercial spaces. Using a break clause to end a long-term lease that’s below market rate can allow landlords to renegotiate terms at a more favourable rate.
Mitigating financial risks: If a property doesn’t meet the required EPC standards, letting it out can attract penalties. By invoking a break clause, landlords can proactively mitigate the risk of financial penalties.
Strategies for landlords to ensure EPC compliance in lease agreements
- Review the terms of any existing leases to establish whether any costs of improving or meeting the EPC rating can be recovered from the tenant.
- Impose restrictions on the tenant from carrying out any works or alterations to the property that could have an adverse impact on its EPC rating.
- Include a provision in the lease that prevents any reinstatement of the property by the tenant where it may or would adversely affect its EPC rating.
- It is recommended that landlords should consider EPC requirements at the heads of terms stage.
If you’re a commercial landlord, our Head of Real Estate Asif Moghal can advise you on how appropriate energy efficiency provisions can be incorporated into your commercial lease to best protect your position.
Get in touch with Asif:
01454 210 976
