The future of minimum energy efficiency standards for commercial property after 2023

Since the introduction of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations in 2015 (the Regulations), the improvement of the energy performance in domestic and non-domestic private rented property has become a hot topic, for landlords and tenants alike.

The Regulations introduced minimum energy efficiency standards (MEES) which apply to domestic and non-domestic private rented property.  There has been a phased introduction of the MEES however, from 1 April 2023, all private rented property (even where there has not been a lease renewal) is required to meet a minimum E Energy Performance Certificate (EPC) level unless an exemption is available. 

In March 2021, the Government released a consultation paper with proposals requiring all non-domestic rented properties to meet a minimum C EPC level by 1 April 2027 and a minimum B EPC level by 1 April 2030 as part of the Government target to bring the UK greenhouse gas emissions to net zero by 2050. This would place around 85% of current non-domestic rented properties within the scope for enforcement action. The proposal received 91% support during the public consultation, provided the requisite energy performance improvements are cost effective for business and individuals.

What does this mean for landlords and tenants?

Should the proposals in the consultation paper become legislation, implications may include the following:

1. Raising energy efficiency in compliance with stringent new MEES proposed for 2027 and beyond will likely entail significant costs. The consultation paper states that the government is considering amending the Regulations to place some MEES obligations on tenants but does not state what those will be. In the meantime, compliance with the Regulations remains the responsibility of the landlord. Whether or not a landlord can recover improvement costs from a tenant remains (and may well continue to be) dependent on negotiations and the specific terms of the lease. Landlords and tenants will need to be aware of both the current Regulations and any future changes made to the same when negotiating service charge provisions, statutory compliance requirements and green lease covenants in new leases and lease renewals; 
2. Under the new proposals, suggestions have been made that obligations be put on agents to refuse to market property or solicitors to refuse to complete transactions until a valid EPC is provided and the EPC rating is brought up to the required standard. This would mean landlords would need to ensure compliance with MEES requirements well in advance to avoid delays in transactions (and may well lead to additional complications in the event of statutory lease renewals);
3. There is a proposal that all listed buildings and those in conservation areas that are rented out be required to hold an EPC (although landlords may be able to claim exemptions where they do not meet the required EPC level). This would be simpler and clearer than the existing position, but will in many cases impose additional cost and practical burdens on landlords of listed buildings and those in conservation areas;   
4. Where a property is let on a shell and core basis the tenant’s fit-out works would often significantly improve the EPC rating. If enforcement action runs from the point of letting or sale (as per the current arrangements), a landlord may be compelled to install arbitrary installations that the tenant immediately removes or replaces as part of its fit-out works. This is likely to be exacerbated by the proposals in the consultation paper for tougher new MEES. The government’s proposals include a temporary exemption being introduced so MEES are not enforced against a landlord until a tenant has been in occupation for at least six months (to allow a tenant time to improve the MEES as part of its fit-out). Under these circumstances there may be a move towards landlords insisting on tenant lease obligations to complete their fit-out to a defined minimum specification within this period to ensure the property will not be sub-standard.  

The government’s proposals in the consultation paper also include other alterations to the Regulations such as changes to rules governing when an EPC is required, enforcement of EPC obligations, sanctions, review of exemptions and registration of EPCs.

As will be apparent from the above, this is an area of law which can be expected to develop rapidly over the next few years. For now, careful consideration should be given to the Regulations, as well as the government proposals as they are formulated and developed so appropriate wording can be included in head of terms and new leases. Landlords should also be reviewing their portfolio to check which properties fall below the required standards and what can be done to make sure all the relevant proposed benchmarks can be met.

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