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Energy Efficiency - Can you afford to ignore it?

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Energy Performance Certificates (EPCs)

Owners of a commercial property – whether they intend to rent or sell the property – must comply with various obligations before the rental or sale of the property can take place. This could involve capital expenditure for an owner/landlord – something not to ignore.  

Buildings are responsible for almost 40% of the UK's energy consumption and carbon emissions and so understanding how to reduce and manage this energy consumption is important in terms of achieving carbon reduction targets, as well as reducing the building's running costs.

Energy Performance Certificates (EPCs) were introduced in England and Wales on 1 August 2007 and are intended to promote the improvement of the energy performance of buildings and to identify ways in which the energy performance of buildings and associated costs can be reduced.

An EPC gives a property an energy efficiency rating from A (most efficient) to G (least efficient) and is based on a complex calculation, which looks at a number of factors such as the age and type of building and its construction, insulation and heating systems. Once commissioned an EPC lasts for 10 years.

Subject to various exemptions, an EPC is required when an existing building is sold or rented out; when a building under construction is finished; or after refurbishment of a building when there are greater or fewer separate parts of the building and the modification includes the provision or extension of fixed heating, air conditioning or mechanical ventilation systems. A property owner/landlord need to comply with this requirement prior to marketing the property for either rental or sale as an EPC must be made to a prospective buyer or tenant free of charge at the earliest opportunity to enable potential buyers or tenants to consider energy performance as part of their investment.

Minimum Energy Efficiency Standards (MEES)

Whilst standards to tackle the performance of new buildings have been around for some time, minimum standards to drive improvements in existing older commercial property stock - through energy efficiency upgrades - are essential as we move forwards to tackle energy used and to reduce emissions across non-domestic properties.

As a result of this the government created provisions (within the Energy Act 2011) to ensure energy efficiency standards for domestic and non-domestic buildings are of a certain level. The energy efficiency regulations are designed to tackle the very least energy efficient properties in England and Wales – those rated which an energy efficiency level of “F” or “G” on the EPC (referred to above).

The concerns are that these properties waste energy and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (otherwise known as the Minimum Energy Efficiency Standards (MEES) establish a minimum standard for both domestic and non-domestic property (although we will be concentrating on non-domestic property) and around 18% of non-domestic properties are in the very lowest energy performance certificate (EPC) bands (‘F’ or ‘G’) which

Therefore from 1 April 2018, the MEES Regulations apply upon the grant of a new lease to a new tenant and the grant of a new tenancy to an existing tenant which will count as a new lease and so caught by MEES Regulations where an EPC exists for that property.

This means that a landlord cannot grant a lease of a commercial property where the energy efficiency of that property is an F or G rating on the EPC. As mentioned above, this could involve capital expenditure on the part of a landlord in getting premises up to the required standard for the lease to be granted. This is subject to various exemptions.

It is also important to bear in mind that from 1 April 2023, the MEES Regulations will apply to all non-domestic property including where a lease is already in place and the property is occupied by a tenant – this can cause its own headaches and problems for a landlord!!!

In summary, a landlord of a commercial property must not grant a new tenancy (including a renewal) after 1 April 2018 and must not continue to let a property after 1 April 2023 where the property is substandard (i.e. where a valid EPC has a rating below ‘E’) unless:

  • the landlord of the substandard property has made all relevant energy efficiency improvements for the property that can be made, or that there are no relevant energy improvements that can be made (and the property is still substandard) and the landlord registers an exemption on the Exemptions Register,

or

  • an exemption applies and has been registered on the Exemptions Register.

Whilst it is important to comply with requirement to provide an EPC and to comply with the MEES regulations, commercial property owners can take pre-emptive steps to quantify and mitigate any risk in complying with the MEES regulations, as follows:

  • review and audit property portfolios to identify those properties which do not have EPCs and those properties which are substandard;
  • undertake EPC assessments for substandard properties to confirm the ratings;
  • review and understand how lease terms, renewal cycles, EPC expiry dates, break dates, and planned refit periods fit with the MEES timetable;
  • review leases to understand their rights and update standard leases to incorporate appropriate lease provisions for MEES;
  • update tenant fit-out and dilapidations processes to comply with MEES requirements

For more information as to the impact of the MEES regulations and how they affect you as a commercial property owner and for all other commercial property enquiries, please contact me on angelaguess@brethertons.co.uk.

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