WHERE DO COMMERCIAL LANDLORDS NOW STAND ON MINIMUM ENERGY EFFICIENCY?

For several years, commercial landlords have been aware of their minimum energy efficiency obligations.? However, recent announcements suggest that the direction of travel may have changed. Property litigation specialist, James Holton, identifies the key considerations for landlords and tips on how to navigate the changing landscape.

WHAT IS CURRENTLY THE LAW REGARDING MINIMUM ENERGY EFFICIENCY?

Currently, it is unlawful to grant a lease of non-domestic private rented property (i.e. most commercial property) without the building having a minimum energy performance certificate (‘EPC’) rating of E.? If the EPC rating is F or G then the property will be sub-standard and it will be unlawful to grant a lease.

ARE THERE EXEMPTIONS?

Landlords can apply for various exemptions including:

• Where the tenant does not consent to the works being undertaken.
• Where the improvement would result in a reduction of more than 5% in the market value of the property.
• During the first six months in which the party has become a landlord.

Landlords should note however that many of the exemptions only apply for five years.? Therefore, a landlord of non-compliant property will need to apply to renew their exemption every five years.

WHAT ARE THE CONSEQUENCES OF FAILING TO COMPLY?

If the landlord fails to comply with the regulations, then the local authority can serve a penalty notice (civil rather than criminal).

The penalties are as follows:

CHANGES TO MINIMUM ENERGY EFFICIENCY STANDARDS (MEES)

Since 2019, the Government has been consulting on a phased increase of the minimum EPC rating to C or above.? The proposed changes would come into effect from 1 April 2025 for new tenancies and from 1 April 2028 for existing tenancies.

The proposed changes seek to increase the fine for such breaches from ￡5,000 up to an eye watering sum of ￡150,000 per demise.

However, on 20 September 2023, Prime Minister, Rishi Sunak, made a speech which was widely seen to water-down the Government’s net zero targets.? The accompanying press release stated that:

“…new policies forcing landlords to upgrade the energy efficiency of their properties will be scrapped”

and

“Under revised plans, the Government will … scrap policies to force landlords to upgrade the energy efficiency of their properties, but instead continue to encourage households to do so where they can.”

Whilst the requirement for landlords of residential property to increase the energy efficiency of their properties has been scrapped, the commercial sector still awaits clarification on what this means for the MEES regime.? However, for the meantime, the current minimum EPC rating of E remains in effect as do the fines set out in the table above.

WHAT ACTIONS CAN A LANDLORD TAKE?

Landlords should remain alert to their responsibilities and ensure that they comply with the current regulations whilst being mindful of the changing regulatory landscape.

Landlords can protect their position and minimise risk as follows:

• Audit their portfolios to understand which properties are within scope of the MEES regulations and whether any exemptions apply.
• Carry out energy assessments to check whether the EPC ratings are correct and what improvements can be made.
• Review lease precedents for the purpose of entering into so-called “green” leases where possible. This could allow the costs of the energy efficiency improvements to fall under environmental management and be shared for the benefit of both landlord and tenant.

For further details and advice on MEES please contact James Holton at [email protected].

DTM Legal has a specialist commercial property team with expertise in landlord and tenant, renewable energy and property disputes.