Background
As most commercial property owners are aware, the Energy Performance of Buildings (England and Wales) Regulations, were introduced in 2012 and these set out the current regime for energy performance certificates. A key part of these Regulations is that an owner of a commercial property is required to provide an energy performance certificate on the grant of a new lease and when the property is sold.
An energy performance certificate gives the property in question an ‘asset rating’ which shows how energy efficient the property is. The ratings range from A to G, with ‘A’ being the most energy efficient and ‘G’ being the least energy efficient.
Failure to produce an energy performance certificate can lead to the property owner being subject to a financial penalty (of between 500 to 5,000, depending on the rateable value of the Property).
In a further attempt to try and reduce greenhouse gas emissions by improving the energy efficiency of rented buildings, the Government has recently introduced the Minimum Energy Efficiency Standards (MEES), the last part of which came into force on 1st October 2017.
Impact on Landlords
A landlord is now required to ensure that their privately rented non-domestic property meets the MEES, subject to some exemptions, which include;
a) Consent exemption – where the landlord has been unable (within the preceding five years) to increase the property’s EPC band from an E rating because the Tenant or a third party has refused to consent to any improvement required or has refused their consent to the landlord entering into a Green Deal Plan;
b) Devaluation exemption – if in the preceding five years, the Landlord has been unable to increase the property’s EPC band from an E because the energy efficiency improvement would result in a devaluation of more than 5% in the market value of the property, as certified by a surveyor (in which case the Landlord will need to register that they are relying on this exemption in the Private Rented Sector Register);
c) Temporary exemptions – these are exemptions which are available to a landlord for six months after the occurrence of;
i) the grant of a lease by order of the court;
ii) the grant of a lease by operation of law;
iii) the tenant’s insolvency;
iv) the landlord having been a former tenant or guarantor has exercised the right to obtain an overriding lease;
v) the lease being granted pursuant to a contractual obligation.
Of most importance to landlords of commercial properties is Part 3 of the MEES. Part 3 provides that where a property is ‘sub-standard’ (meaning that its energy performance rating has fallen below asset rating E), the Landlord may not;
a) Grant a new tenancy or extend or renew an existing tenancy on or after 1st April 2018; or
b) Continue to let a commercial property on or after 1st April 2023.
In this case, the landlord will need to carry out ‘energy efficiency improvements’, which are those;
a) Paid for under a Green Deal Plan, which was a plan implemented by the Government to encourage owners of property to make them more energy efficient (by allowing providers to install energy efficient equipment at a property with no upfront cost. The costs would then be attached to the occupier’s electricity bill). It should, however, be noted that the Government has now stopped funding for this; or
b) Listed in Table 6 of the Building Regulations Approved Document L2B (for example, by upgrading heating, cooling or air-handling systems which are more than 15 years old, replacing windows (not including display windows) which have a poor efficiency rating and by carrying out the measures specified in the property’s EPC and Recommendation Report).
Once the improvement works are carried out or where there are no energy improvements which can be made, the property will be treated as compliant for five years.
The penalties for non-compliance can be severe and include financial penalties (of 10% the rateable value of the property, up to 50,000 (or higher, if a penalty notice has been served but the property owner has not remedied the breach) and publication penalties.
It is also important for tenants to be aware of the MEES as, if they were to grant a sublease, it would be their responsibility to ensure that the property meets the MEES requirements.
Points to consider
A landlord should be aware of the implications of the MEES and, if improvement works are needed, they should consider how they may wish to finance these works.
A lease should be carefully drafted to ensure that, if the landlord decides to pay for these works themselves, the lease allows for recovery of the cost of these works via a service charge. The Landlord may also wish to consider charging a higher rent if they are already aware that they will incur improvement costs during the term of the lease.
If the landlord decides to finance the works using the Green Deal Plan, repayments would usually fall on the tenant so they may wish to consider this.
A lease should also allow for the landlord to commission an energy performance certificate at any point during the term and ensure that the Tenant does not apply for their own energy performance certificate (which may have a lower rating that the landlord’s energy performance certificate and would also supersede the landlord’s certificate).
It is also a good idea for tenants to be restricted from carrying out any work which may reduce the energy efficiency of the property and, it is recommended that a landlord considers the MEES when a tenant applies for consent to carry out works.
If you are considering granting a new lease or a renewal lease, or if you are a tenant requiring advice before entering into a lease, please do not hesitate to contact a member of our commercial property team on 01206 764477.
Please note that this article focuses only on the impact on commercial properties and not domestic properties.
This article has been written by Lauren Philpot, a solicitor from our Commercial Property team.