Energy efficiency measures are set to affect commercial landlords
Fiona Gibson from TSP's commercial property team talks about the latest measures and what commercial landlords need to do.
Most landlords will have heard of the Minimum Energy Efficiency Standard Scheme (MEES) which has applied to the grant of new leases and lease renewals since April 2018. The next important date under the scheme is 1st April 2023 from which date a commercial property must have an Energy Performance Certificate (EPC) rating of E or above before it can be let or continue to be let.
What does this change mean?
This means that all current leases and landlords will be in breach of the MEES regulations if they continue to let a “sub-standard property” ( i.e. one with an EPC rating of F or G) unless:
(a) they have made all possible cost effective energy efficiency improvements prescribed by the regulations or
(b) one of the exemptions applies and the property is registered on the PRS register as being exempt.
Note that “cost effective energy efficiency improvement” in the context of commercial property letting are works that will pay for themselves in 7 years or less – i.e. the cost of the improvement works must be less than the energy cost saving over the 7 year period. A landlord must specifically claim an exemption to continue to let a sub-standard property if all cost-effective energy efficiency improvements have been carried out or if, in fact, there are no such works that can be done.
In addition, the government intends to raise the bar under the MEES to an EPC B rating by 2030 (with an interim step by 2027 in advance of this). Listed buildings are in the firing line and are likely to come within the regime. For larger commercial and industrial buildings, other measures will include the need to assess energy use and carbon emissions, a requirement for energy certificates to be displayed on site and publishing a rating for the building based on metered energy use data.
What practical steps should landlords now take?
· consider if their property requires its own individual EPC under the regulations.
· audit their property portfolio and identify which property requires improvements and /or if they need to apply for an exemption.
· log any exemptions (with supporting documentary evidence) on to the public register; monitor these and note their lifespan. Most last for 5 years, although exemptions can be claimed more than once.
Exemption grounds for commercial properties include: (i) 6 months’ hiatus for new owners/landlords of let property (ii) consent to the works is required and unreasonable conditions are imposed by the person who would provide consent (iii) the works would reduce the market value of the property by more than 5%.
Can the landlord recover the cost of energy improvements from the tenant?
If the parties are considering a new lease, this will depend on what the parties negotiate so it is important to know the cost (and cost benefit to the tenant of energy saving improvements and lower energy bills) before negotiations begin. If the lease is already in place, the parties should consider the provisions of the existing lease which, if well drafted, will set out the parties’ obligations and liabilities. Other relevant clauses to consider in a commercial lease include: service charge provisions, any consents needed, and reinstatement obligations.