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Home Headlines ENERGY EFFICIENCY: A TIME-BOMB FOR LANDLORDS OF COMMERCIAL BUILDINGS
Headlines

ENERGY EFFICIENCY: A TIME-BOMB FOR LANDLORDS OF COMMERCIAL BUILDINGS

by Jessica Weisman-Pitts

NET Zero is a big topic of conversation at the moment and recently, the government set a target of lifting the minimum energy efficiency standard in to let non-domestic buildings to ‘B’, as part of the government’s target for the UK being net zero by 2050. Martin Jinks, commercial property law consultant at Nelsons, discusses the new minimum energy efficiency standard and examines what still needs to be considered to make it possible. 

Currently, subject to exceptions, a landlord must not let a building that does not comply with the minimum required energy efficiency standard, originally set at an ‘E’ rating on a valid Energy Performance Certificate (EPC). Many landlords may be relaxed, knowing their buildings are rated ‘E’ or better for energy efficiency but they could be sitting on a time-bomb as the government has recently set a target of lifting the minimum energy efficiency standard in relation to let non-domestic buildings to ‘B’ by 2030.

To B or not to B 

The government estimates that the implementation of the EPC B target will cover around 85 per cent of the UK’s non-domestic rented stock and will help the UK achieve its target of net zero carbon emissions by 2050.

The Department for Business, Energy & Industrial Strategy has now published an open consultation on changes to the Minimum Energy Efficiency Standards (MEES) Regulations in the commercial sector, entitled ‘Non-domestic Private Rented Sector minimum energy efficiency standards: EPC B implementation’.

As stated in the open consultation report, the government proposes a phased implementation of the ‘B’ minimum standard by setting an interim milestone in 2027 for a minimum standard of ‘C’, but the way in which it proposes to do this needs to be analysed.

The government currently estimates that around 10 per cent of non-domestic let buildings are below the ‘E’ rating. As from 1 April 2023, a landlord can only lawfully continue to let a non-domestic building if the building has an energy rating of ‘E’. It is possible that in the period after 2023, the landlord’s building does not have a valid EPC because, although one was obtained when the lease was granted, it has expired – EPCs only have a 10-year lifespan.

As part of its package of measures, the government intends to alter this so that a building must always have an up-to-date EPC during the whole time that it is let. This would cover cases of lease renewal where current guidance suggests that an EPC is not necessary where an existing tenant is renewing its lease.

Compliance Windows

The government is proposing two ‘Compliance Windows’ in the second half of this decade, which are as follows:

The first Compliance Window from 2025 to 2027

From 1 April 2025, all non-domestic rented buildings within the scope of the MEES regulations would have to have a valid EPC, meaning that if one had expired, a new one must be obtained.

The paper talks about a requirement for a landlord to “present” a valid EPC by 1 April 2025. This means that the landlord will have to submit its EPC to an online Private Rented Sector compliance and exemptions database.

From 1 April 2027 the minimum required rating would increase to ‘C’, so that landlords must have improved the building by then, or have registered a valid exemption. If the building already possessed a ‘C’ rating at April 2025, the landlord would be in compliance with the regulations. However, if not, the landlord would have to present a new EPC with its ‘C’ rating by 1 April 2027, or register an exemption.

The second Compliance Window from 2028 to 2030

A landlord would have to present a valid EPC by 1 April 2028 and from 1 April 2030, the minimum rating would increase to ‘B’. If the building already possessed a ‘B’ rating at April 2028, the landlord would be in compliance. However, if not, the landlord would have to present a new EPC with its ‘B’ rating by 1 April 2030, or register an exemption.

Looking ahead

This ‘four juncture’ approach is a move away from enforcement at the point of letting. Dispensing with compliance at the point of letting will assist with the ‘shell and core’ problem.

In new ‘shell and core’ lettings, where a landlord lets a unit in a stripped-out condition, with the tenant to fit out, including installation of heating and lighting, at the point of letting, an EPC for the building is likely to give an ‘F’ or ‘G’ rating, thereby making it unlawful for the landlord to let.

Options for compliance would include either the tenant obtaining early access to fit out, or the landlord installing items which the tenant then replaces. While the proposed new framework for compliance would still require a landlord to hold a valid EPC at the point of letting, for the purposes of complying with the MEES Regulations, the building would simply need to achieve a ‘C’ rating by 2027 and a ‘B’ rating by 2030, regardless of when it was let.

For those lettings occurring close to a compliance date, a specific exemption could be introduced. Hence, the government is proposing to enforce MEES only once a unit is fully operational and has been occupied for at least six months.

However, the tenant’s fit out may have a significant impact on the final EPC rating, and thus on compliance. The government is therefore considering ways in which tenants can take on a share of the legal responsibilities in relation to MEES by imposing duties upon them.

The consultation ran until 9 June 2021. The government aimed to publish a response at the end of 2021, but this has yet to be done as they are still analysing feedback, and propose  for the regulations to take effect from April 2025.

For more advice on commercial property from Nelsons, please visit https://www.nelsonslaw.co.uk/commercial-property/

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