Roundup of The Minimum Energy Efficiency Standards Regulations and in particular the implications for owners of commercial property from 1 April 2018.
The requirement for energy performance certificates (EPCs) on the sale or letting of commercial property was first introduced in April 2008. Since then, the government has indicated via various amendments to the EPC Regulations, and the introduction of a number of other initiatives, its intention to make the energy efficiency of non-domestic buildings an important factor in the decision-making process of buyers and tenants.
Until the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, known in the industry as the minimum energy efficiency standards (MEES), were passed earlier this year, the government’s efforts had largely failed as capital and rental values indicated that buyers and tenants were remaining stubbornly undeterred by a property’s lack of energy efficiency. The introduction of those standards, which will come into effect in April 2018, is set to change that.
From 1 April 2018 it will become unlawful for the owner of a commercial property to let it if it has an EPC rating of “F” or “G”. This will include lease renewals and extensions. Thus even now, two and a half years away from the commencement date, property values are starting to be affected as investors become mindful that where a property has such a rating, potentially expensive remedial works will be needed in the coming years to ensure it remains a viable investment for the future.
The well-advised commercial property owner will be seeking to ensure that any leases granted between now and April 2018 place on the tenant the obligation (and the associated costs) to bring the property up to the required energy efficiency standard. Specific wording will be needed in the lease to achieve this aim and it is likely to be strongly resisted by a tenant unless perhaps accompanying rent concessions are offered. The repairing and statutory compliance provisions of pre-existing lease precedents are unlikely to be sufficiently worded to place such an obligation on the tenant.
Investors inclined to ignore the Regulations on the basis that their “F” or “G”-rated properties are already let for lengthy terms should be aware that a further milestone will be introduced on 1 April 2023, from which date it will become unlawful to continue to let “F” or “G”-rated commercial property (note though that the Regulations do not apply to leases for 99 years or more).
The validity of the lease and the enforceability of its terms between the landlord and tenant will not be affected by the change in the law. If the landlord fails to carry out the requisite remedial works, a continuation of a pre-existing lease beyond that date will amount to a breach of the Regulations for which the landlord may be liable to a fine.
There are a limited number of exemptions in the regulations of which a landlord may be able to take advantage of if the relevant circumstances exist: these broadly cover an inability to obtain a relevant consent to improvements, the devaluing effect of improvements or a temporary exception following the grant of a lease in certain exceptional circumstances. The potential implications of the new minimum energy efficiency standards are far-reaching and potentially game-changing for those looking to invest and, indeed, already investing in commercial property.
For a fuller appraisal of the MEES Regulations, their impact on you and how you could seek to limit your financial exposure, please contact us.