Energy efficiency compliance deadline approaches for commercial landlords

From 1 April 2023, it will constitute a breach of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the MEES Regulations) to “continue to let” commercial property in England and Wales on certain types of tenancy unless, where a valid EPC exists for that property on that date, it has a rating of at least an E or one of the applicable exemptions applies and has been registered.

Many landlords have been preparing for this change by assessing their portfolios to identify which continuing lettings within them will be caught by this new requirement and planning how they will ensure compliance. In the final months leading up to 1 April 2023 any extant issues will need to be dealt with if landlords are to avoid the risk of significant financial or reputational penalties for non-compliance, but landlords must also look to the future given the likely prospect of more stringent requirements being introduced in the years ahead.

Which “continuing” lettings will be affected?

In general, any tenancy which is not of a dwelling will be subject to the 1 April 2023 MEES Regulations compliance deadline. However, some tenancies will fall outside the scope of the regime.

Tenancies that exist within the category of building types which are not required to have an EPC are not caught by the requirements. These include certain buildings used for specific public purposes or certain types of building listed in Regulation 5 of the Energy Performance of Building Regulations (England and Wales) Regulations 2012. The latter includes certain non-standard types of non-domestic buildings and also buildings which are “officially protected as part of a designated environment or because of their special architectural or historic interest” – a definition which has caused confusion and uncertainty – where compliance with these regulations would unacceptably alter their character or appearance.

In general terms, most standard types of commercial property will not fall within a category which will escape the requirements of the MEES Regulations unless the property is earmarked for demolition and can satisfy the criteria to evidence this, as set out in Regulation 8 of the 2012 Regulations.

All tenancy types of commercial property will be caught, save possibly tenancies at will, except leases for a term lasting 99 years or more or tenancies for terms not exceeding six months with no provision for extension or renewal and where the tenant has not, at the grant of the tenancy, been in continuous occupation for a period exceeding 12 months. However, there is confusion about whether an EPC is required on lease renewals. There are conflicting statements about this in the MEES Regulations, in associated government guidance, in the 2012 Regulations, and the 2021 consultation on updating the MEES Regulations.

Where a continuing letting would not fall outside the MEES Regulations for the reasons above, if in fact there is no current valid EPC for the property on the 1 April 2023, then the requirement for at least an EPC E rating on that date will not apply either. Accordingly, in cases where tenancies continuing on that day commenced prior to the need to produce an EPC, or where any EPC was registered more than 10 years before 1 April 2023, the requirement for at least an EPC E rating on that date will not apply. However, if at any point after that date there is a trigger for a new EPC – i.e. a sale, new letting or sub-letting, or relevant modifications to the property – this will trigger the need for a new EPC with at least an E rating for any continuing letting.

Ascertain the correct current EPC rating

Before planning any improvement works which may be possible despite the continuing tenancy, or considering the availability of one of the exemptions from the requirement for an EPC rating of at least an E, landlords would be well advised to review existing EPCs with F or G ratings obtained prior to June 2022 to ascertain what the EPC rating would be if the updated EPC modelling which came into force in June 2022 was used.

The updated modelling methodology changed in several respects and, in particular, updated fuel factors and carbon intensities to reflect the increased decarbonisation of the national grid over the prior 10 years. It is generally considered that some existing EPC ratings, particularly for electrically heated buildings, could improve under the new methodology and equally that some may be worse.

EPC modelling can be carried out without any new EPC being created or registered. EPC ratings may also improve if the actual properties of the building are used rather than default values being used.

Properly working out likely current EPC ratings using the new methodology and better input information will enable landlords to focus on whether non-compliance could be avoided by registering a new EPC or whether they need to focus on ensuring compliance another way.

Available exemptions

There are exemptions to the requirement to have an EPC rating of E or better. These are:

• that all “relevant energy efficiency improvements” have been made or there are none that can be made. For commercial properties “relevant energy efficiency improvements” will be those within prescribed lists of improvements referred to in the MEES Regulations where those have been included in the recommendation report which accompanies any EPC or have been recommended in any surveyor’s report and only where those works satisfy the seven-year payback test, which is applied on an item-by-item basis;
• that the landlord is unable to obtain any consent at all or on terms the landlord can reasonably comply with which is required from any third party – including the tenant, any superior landlord, any mortgagee, and planning consent – to carry out relevant energy efficiency improvements despite reasonable efforts to obtain that consent;  
• that the landlord has not carried out relevant improvements because it has a report within the five years preceding 1 April 2023 stating that the relevant improvement(s) would reduce the value of the property by more than 5%;
• that a temporary exemption applies for six months from the date on which a new landlord becomes landlord by purchase of the property, by virtue of contractual provisions for the grant of a new lease, by the deemed creation of a new lease by operation of law or by virtue of various statutory schemes which create a new landlord. Full details of these are in Regulation 33 of the MEES Regulations.

All exemptions must be registered on the PRS Exemptions Register to be effective. Once registered, exemptions will generally apply for five years, though not in the case of the temporary exemption which will apply for only six months nor, potentially, in the case of the consent exemption which may end before five years if the current tenancy ends or is assigned, where the consent required was the tenant’s consent. The duration of the consent exemption is an area of uncertainty. Government guidance on the MEES Regulations makes it clear that the benefit of registered exemptions do not pass to a new landlord.

Actions for landlords

Landlords that still have steps to take to ensure compliance with the MEES Regulations in respect of continuing tenancies by 1 April 2023 should be aware of the significant financial penalties non-compliance may attract.

For breaches lasting less than three months, fines can be the greater of £5,000 or 10% of rateable value, subject to a cap of £50,000. For breaches lasting more than three months, fines can be up to the greater of £10,000 or 20% of rateable value, subject to a cap of £150,000. Enforcement can also include a “publication penalty”, which involves publication of the breach and any financial penalty on the PRS Exemptions Register.

The Climate Change Committee has criticised the government for the lack of enforcement of the MEES Regulations and the government appears to have heard that criticism. The 2021 consultation on the MEES Regulations for commercial properties included proposals for improving enforcement.

Although the immediate focus may be on the need for compliance in respect of continuing tenancies by 1 April 2023, landlords will also be aware of the government’s announced intention to increase the minimum energy efficiency requirements for commercial property which is let to an EPC B rating by 1 April 2030, with a possible interim uplift to an EPC C rating from 1 April 2027.

Landlords committed to reducing carbon emissions from their properties as early as possible and staying ahead of the trajectory of proposed regulation will have considered or be considering holistic schemes of works which avoid piecemeal just-in-time improvements which may be wasteful and may increase embodied carbon in the operational phase of their buildings.

Co-written by Paul Roberton of Pinsent Masons.