Commercial Landlords Will Be Impacted By Increases To Minimum Energy Efficiency Standards From 1 April 2023
Landlords of commercial properties in England and Wales need to take note of and potentially prepare for increased minimum energy performance requirements, which come into force on 1 April 2023.
The new changes are a tightening of the Minimum Energy Efficient Standards (MEES) introduced in 2018, which made unlawful the grant of new leases and lease renewals for non-domestic properties with an Energy Performance Certificate (EPC) rating of lower than a grade ‘E’.
From 1 April 2023, subject to certain exemptions, all tenanted non-domestic properties will have to have been awarded at least an ‘E’ rating or better on their EPC for landlords to continue to let the property. Therefore, the current MEES regulations are to become applicable to existing leases of non-commercial property.
Does your property require an EPC?
Certain types of commercial property do not require an EPC and are therefore excluded from MEES regulations. These include
- Properties that do not use energy, i.e. heating or aircon, to moderate the indoor temperature, such as warehouses;
- Listed buildings if compliance would unacceptably alter the building’s character or appearance;
- Temporary buildings with an intended life of 2 years or less;
- Standalone buildings with a floor area of less than 50m2;
- Industrial sites or workshops with low energy demand, although what constitutes low energy demand is not specified; and
- In certain circumstances, properties that are awaiting demolition.
Is your lease exempt from MEES regulations?
Only the following leases are exempt from the MEES regulations:
- Leases with a term of six months or less, unless the lease contains an option to renew or extend beyond six months or the tenant has already been in occupation for more than twelve months; and
- Tenancies that are for a term of more than 99 years.
Can you claim an exemption?
Even if a commercial property requires an EPC and the lease is not automatically exempt, if certain criteria are met, a property owner will be permitted to continue to let what is referred to as a ‘sub-standard’ property.
The principle criteria which must be met to be granted an exemption are:
- Seven Year Payback – The landlord can prove that the expected value of savings on energy bills over a seven year period is less than the cost of improving the property’s energy performance (a Seven Year Payback Test has been published by the Department for Business, Energy & Industrial Strategy);
- Property Devaluation Exemption – The landlord obtains a report from an independent surveyor, in which the surveyor states that making improvements would result in a reduction of more than 5% to the market value of the property;
- All Relevant Works Have Been Completed – There are no further energy efficiency improvements that can be made to the property yet the property still does not achieve at least an EPC ‘E’ grade;
- Third Party Consent Exemption – Consent is required from the tenant or another third party for the landlord to carry out improvement works but the consent is either denied or granted subject to conditions which the landlord cannot reasonably comply with; and
- New Landlord Exemption – A purchaser of a sub-standard property subject to an existing tenancy is afforded 6 months to make improvements to achieve the required energy performance rating of ‘E’ or better.
How do you claim an Exemption?
The government set up the National PRS Exemptions Register ahead of the changes introduced in 2018. The online service allows landlords or agents to enter the relevant details and apply for an exemption free of charge.
The majority of exemptions are granted for up to 5 years. The exceptions to this are
- Exemptions due to lack of tenant consent to complete the works, which last for five years or until the tenancy of the non-consenting tenant comes to an end (whichever is soonest);
- Exemption for recently becoming a landlord, which lasts for 6 months as stated above.
Exemptions are personal and cannot be passed on to a new owner or successor landlord.
What are the penalties for non-compliance?
Failure to comply with MEES can result in a financial penalty and ‘naming and shaming’ through the publication of details of the landlord’s breach on a publicly accessible part of the PRS Exemptions Register for at least 12 months.
Publishable details may include the landlord’s name (except where the landlord is an individual), the details of the breach, the address of the property to which the breach occurred, and the amount of any financial penalty imposed. Once in the public domain, of course, this information can disseminate further.
|Infringement||Penalty (less than three months in breach)*||Penalty (three months or more in breach)*|
|Renting out a non-compliant property||● Fine of up to either:|
£5,000 fine or 10% of rateable value, with a maximum penalty of £50,000, whichever amount is greater.
● Publication of non-compliance
|● Fine of up to either:|
£10,000 or 20% of rateable value, with a maximum penalty of £150,000, whichever amount is greater.
● Publication of non-compliance
|Providing false or misleading information or failing to comply with a compliance notice||Up to £5,000 Publication of non-compliance||Up to £5,000 Publication of non-compliance|
*The maximum penalty amounts apply per property and per breach of the Regulations
Can a decision to award a penalty be appealed?
If a penalty notice is received, a landlord may first request the enforcement authority review their decision. If the decision is upheld, the landlord may appeal to the First-tier Tribunal (General Regulatory Chamber).
However, appeals will only be successful in limited circumstances, such as if it can be proved the penalty notice was based on an error of fact or an error of law, does not comply with a requirement imposed by the Regulations, or was ‘inappropriate in the particular circumstances’.
Will minimum energy performance requirements be tightened further in the future?
Increasing energy performance requirements for let non-domestic and domestic property is an integral component of the government’s Clean Growth Strategy and overall plan to achieve net zero emissions by 2050.
The Minimum Energy Performance of Buildings (No. 2) Bill, which parliament is in the second reading of, proposes to increase the minimum EPC rating of let non-domestic property to at least a grade ‘B’ by 2030 and let domestic property achieve at least a grade ‘C’ by 2035.
Therefore, landlords of commercial and non-commercial property must expect and plan for regulations to be tightened incrementally over the next few decades.
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