Commercial property landlords should be aware of an important deadline coming up in the very near future. On 1st April, the application of minimum energy efficiency standards (MEES) for commercial properties come into effect. This will mean that landlords who own properties which are rated either ‘F’ or ‘G’ on the energy performance certificate (EPC) scale will be prohibited from continuing to lease them. Consequently, landlords in this situation will be required to make the necessary improvements, regardless of whether the property was leased out before or after MEES comes in.
MEES has already applied to the grant of new leases or the extension of existing leases since 1st April 2018. These changes will be of interest from a range of people, including landlords, investors, developers and tenants due to the impact it will have on the property market.
Despite the freezing temperatures, energy efficiency is a hot topic at the moment due to the energy crisis and large increase in energy prices. While households and businesses alike have been financially supported following legislation brought in by the short-lived Truss government, businesses are set to lose that support by April 2023, when it will be replaced by the less comprehensive “Energy Bills Discount Scheme”.
It is important to point out that these changes to the Minimum Energy Efficiency Standards will only apply to commercial properties. Since April 2020, residential properties have already been required to be rated E or higher. This will be upgraded in 2025 to a rating of C for new residential lettings. Previously, standards for commercial properties have not been as high, but this new legislation brings commercial properties in land with the residential sector.
Keep reading to learn more about the changes and what they will mean for commercial landlords.
What is an EPC rating?
Firstly, what is an EPC rating? You might already have a fair idea of what an EPC rating is if you have ever rented or bought a property. Put simply, an EPC rating provides a useful indication of how energy efficient a property is. This is helpful information for anyone looking to lease or purchase a property, whether it is residential or commercial.
Properties are rated on a scale from A to G. As previously mentioned, since April 2020 residential properties have to be rated at least an ‘E’, with commercial properties now also required to be rated as such.
Owners of commercial properties that do not have an EPC rating of A to E will need to carry out sufficient works in order to bring the properties up to scratch, register a valid exemption, or face the consequences of a penalty. While MEES does not prohibit the sale of a property which falls into the ‘F’ or ‘G’ energy performance category, they are unlikely to be as easy to sell given that it will no longer be possible to lease properties in these categories.
What are the penalties?
Properties which do not comply with the new regulations can face a both a civil financial and publication penalty. These penalties will vary depending on a few factors including the length of the breach and the rateable value of the property. For a breach of less than three months the maximum penalty is the greater of £5000 or 10% of the rateable value of the property at the date of service of the penalty notice, up to a max of £50,000.
On the other hand, breaches of three months or more would naturally face a greater penalty. For a breach of this length of time, the maximum penalty would be £10,000 or 20% of rateable value of the property on the date the penalty notice was served, up to a max of £150,000.
In addition to a financial penalty, there is also the possibility of a publication penalty. This would mean information about the breach being on the Government’s PRS Exemptions Register. The public nature of this could therefore draw negative attention which the landlord would not want.
What exemptions are there?
While not common, there are certain exemptions for commercial landlords to the minimum energy efficiency standards. These main exemptions include:
- ‘7 year payback’ – If the improvement works made to the property does not pay for itself over a seven year period.
- Devaluation – This type of exemption occurs where an independent survey from the RICS advises that measures which meet specific energy efficiency standards would reduce the market value of the property or the building it is part of by more than five per cent. This exemption generally lasts 5 years.
- Consent – Another exemption may apply where the landlord has been unable to obtain necessary third-party consent such as local authority planning consent, consent from mortgage lenders or having the tenant’s consent to works.
- All improvements made – Quite simply, this is where the property remains sub-standard despite all “relevant energy efficiency improvements” having been made. This exemption lasts for five years before the landlord must try to improve the EPC rating again
There are some other exceptions which do not need to be registered on the PRS Exemptions Register:
- Short leases – leases not exceeding six months (this includes when there is no previous continuous period of occupation exceeding 12 months and no right to renew)
- Long leases – leases of 99 years or more
Our thoughts
We welcome these measures to increase standards within the commercial property sector. With the current Energy Bill Relief Scheme expiring at the end of March 2023 and replaced by an inferior set of measures, any small improvements to improve energy efficiency must be welcomed. While landlords may feel that the MEES are a threat to them, improvements to the energy efficiency of their properties will only help to increase the value of their properties. With the demand for energy efficiency properties higher than ever, this promises to be a good opportunity for landlords, tenants and developers alike.
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