EPC ratings, requirements from April 2018…
Landlords and tenants - If your property has an F or G EPC rating you cannot rent it after April 2018!
With only 12 months to go until private sector landlords of commercial property portfolios will be prohibited from granting new leases of property with Energy Performance Certificate (EPC) ratings of F and G, subject to certain exemptions. While many landlords are considering the risk, the 18% of properties that are F and G-registered pose, few have considered the 47% of properties that are D and E-rated, which may also become caught by the regulations in the next 12 months.
The Minimum Energy Efficient Standards (MEES) came into force in 2016 under the Energy Efficiency Regulations 2015. From 1 April 2018 landlords of non-domestic private rented property are prohibited from granting new lease of any “sub-standard” properties. From 1 April 2023, these requirements will also apply to all existing lettings.
A number of exclusions and exemptions that will enable a landlord to let, or continue to let, a substandard property include leases of less than six months or more than 99 years, properties where an EPC is not required. Otherwise a landlord may be able to register an exemption. The key exemptions are:
- The seven-year payback test: where the capital cost of required energy efficiency measures is not cost-effective within a seven-year payback period.
- Third-party consent: where despite “reasonable endeavours” necessary third-party consents to carry out the energy efficiency improvements cannot be obtained.
- Property devaluation: where the measures proposed would reduce the value of the property by 5% or more.
- Recently becoming a landlord (a temporary six-month exemption): this applies in limited circumstances, including the grant of a lease due to a contractual obligation, pursuant to the Landlord and Tenant Act 1954, or the grant of an overriding lease under the Landlord and Tenant (Covenants) Act 1995.
Exemption will need to be registered before 1 April 2018; otherwise landlords in breach could be subject to a publication and/or financial penalty. The exemptions registered opened on 1 April 2017.
Commercial property at risk?
EPCs were first required for commercial property in 2008 where a property larger than 50 metres squared with fixed services for conditioning the interior environment was built, sold or let. The creation of EPCs was in its infancy both in terms of the software used for the assessments and the scrutiny applied to the assessments. Two vital things have since changed:
- The technology, training and regulation of EPC assessment has become far more refined. This has resulted in the process of EPC assessment being far more accurate and detailed.
- As reflected in regular revisions of the Building Regulations (Approved Document L) the efficiency requirements of buildings and their services have enhanced significantly since 2008.
An EPC is valid for 10 years if the subject property has remained largely unaltered during that time. Usually, however, there is nothing stopping a tenant from having a new EPC carried out and registered, which will supersede a landlords existing EPC. This could cause a fundamental shift in the relative bargaining position of a landlord and tenant.
What could you do?
The MEES Regulations may cause a significant shift in the landlord and tenant balance depending on the property and lease event. The risk potential of a given property can only be judged individually taking into account the validity of the existing EPC, the risk profile of the property failing the MEES Regulations, the ability to recoup upgrade costs from the tenant, and the applicable exemptions if any. While there could be a temptation to commission wholesale renewal of all EPCs across portfolios this could result in the downgrading of a property in circumstances where it could have been lawfully let for the foreseeable future.
If your properties are held in a corporate entity which is audited and/or the properties are valued at fair value EPC ratings, they are likely to be scrutinised.
If you have any concerns regarding the issues discussed in this article please get in touch or contact your local MHA MacIntyre Hudson advisor.