Energy efficiency

Most property practitioners will be aware of the current requirement for non-domestic properties to have a band E energy performance certificate (EPC) rating, or above, before a new letting or sale can take place. 

From 1 April 2023 the law is changing again, so that a landlord may not continue to let a non-domestic property with an EPC rating below an E, unless a valid exemption is registered.

What’s changing?

There are two key sets of regulations which need to be considered when looking at changes to the law in this area:

1. The Energy Performance of Buildings (England and Wales) Regulations 2012 (as amended) which set out the Energy Performance Certificate Regime (EPC Regulations).

2. The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (as amended), which set out the legislative requirements for Minimum Energy Efficiency Standards (MEES Regulations).

The government has also published non-binding guidance notes for both non-domestic and domestic private rented property which should be considered alongside the regulations themselves.

Regulation 27 of the MEES Regulations provides that, from 1 April 2023, a landlord of a non-domestic private rented property may not continue to let a property with an EPC rating below band E unless a valid exemption is registered (this has been the case since April 2020 for domestic properties). 

Future changes

The government published a consultation in 2021 that proposed implementing an EPC band B requirement for all non-domestic private rented properties by 2030, with an interim milestone of band C by 2027.

Although the consultation ended in June 2021 and no further action has been taken since, many within the property industry are working towards these requirements being implemented. New and renewal leases are being granted now with terms that will stretch beyond 2030.  Therefore, those with longer-term investments and interests in property would be wise to consider now what works may need doing to their properties to ensure compliance (and maintain marketability) over the next 10 years.

Which buildings are affected?

If a building has a current and valid EPC it must meet the required standard of a band E rating or above (a valid EPC is one that was entered on the EPC register no more than 10 years before the date it is made available).

However, if a building has no valid EPC, there is no obligation to commission a first EPC for an existing property which is not being sold, rented out or “significantly altered” (as defined within the EPC Regulations). 

There is also no obligation to commission a replacement EPC simply because the existing EPC has expired (say because it is more than 10 years old).

There are also a number of types of buildings exempt from the requirement to obtain an EPC. The full list of exemptions is set out in the EPC Regulations but includes buildings such as those:

• with no roof or walls or which use no energy;
• used as a place of worship or for other religious activities;
• only used for two years or less (temporary buildings);
• that are an industrial site, workshop or non-residential agricultural building with a low energy demand;
• are non-residential agricultural properties;
• used for holiday lets (residential properties not used for much of the year);
• detached buildings with a total floor space under 50 square metres;
• buildings due to be demolished by the seller or landlord; and/or
• listed or officially protected where the MEES requirements would cause them to be unacceptably altered.

Who needs to take action?

The MEES Regulations apply to the landlords of buildings affected. This includes a tenant who sub-lets a property as they will become the landlord of the sub-let space.

Under both the EPC and MEES Regulations there is no requirement on the tenant of a building with an EPC rating below band E to take any action at all and there is certainly no statutory obligation on a tenant to carry out works.

However, tenants should be careful to check the terms of their lease to ensure that it does not contain an obligation to carry out works to improve the EPC rating of their building or demise. Whether the costs of works carried out by a landlord can be recovered from tenants through the service charge will also depend on the wording of the lease and specific service charge mechanisms. Commonly, a lease will allow costs to be recovered for items of disrepair, but not those for improvements, which would apply to many EPC works. 

Landlord requirements

There is also no direct legal obligation on a landlord to undertake specific works.  However, if a landlord does not bring the premises up to the required standard and continues to let the premises then the sanction is payment of a fine (see below).

If a landlord has not done so already, it should be considering the works it needs to do to improve its EPC rating to at least an E standard, or whether it falls under an EPC or MEES exemption.

A surveyor can be appointed to prepare a ‘relevant recommendations report’ which will tell the landlord the works it can do to improve its EPC rating. The works within that report should meet the “seven year pay back test”, set out in MEES regulation 28: Improvements only need to be carried out where they are expected to deliver, within seven years, energy bill savings of at least the cost of purchasing/installing, plus interest at the Bank of England base rate.  

Who pays for/carries out the works?

Unless a landlord has negotiated alternative lease wording with its tenants, the financial burden of improving the property is going to fall on the landlord. 

The rights a landlord has to enter a building to carry out works, recover the cost of works from the tenant or restrict the tenant from applying for an EPC will be set out in the lease between the parties. 

Most new leases will also now require a tenant to obtain landlord consent to procure an EPC and many restrict a tenant undertaking works which will reduce a building’s EPC rating. 

Are there any MEES exemptions?

There are also exemptions within the MEES Regulations. If a landlord wishes to claim one of these MEES exemptions then they will have to apply to have them registered on the PRS Exemptions Register, parts of which are available to the public to search:

Consent exemption (MEES regulation 31) – available where, in the previous five years, a landlord has been unable to increase the EPC rating of its building due to:

• the tenant refusing consent to the relevant energy efficiency improvement (provided the landlord requires consent from the tenant to carry out the works); and/or
• a third party whose consent, permission or approval is needed (such as an occupier, lender with a charge, planning authority or superior landlord) refusing consent to the relevant energy efficiency improvement or granting consent subject to a condition with which the landlord cannot reasonably comply.

In such a case a landlord will have to show it has made ‘reasonable efforts’ to obtain the third party’s consent. The exact format, manner and frequency in which consent must have been requested and refused is not clear from the MEES Regulations themselves.

Devaluation exemption (regulation 32) – available where, in the previous five years, the landlord has obtained an independent surveyor’s report which states that making an improvement may devalue the property by more than 5% of its market value. 

Temporary exemption (regulation 33) – available to the landlord until six months after a certain event occurs, such as grant of a renewal lease under the 1954 Act or purchase of the property.

Relevant works completed (regulation 29) – all relevant energy efficiency improvements have been made and the property remains below a band E rating.

Wall insulation exemption (regulation 28(2)) – improvements are to cavity, internal or external wall insulation and expert evidence states the works will negatively impact the fabric or structure of the property.

While an exemption is valid for five years, it does not pass over on a sale of the property. Instead, the new landlord has six months under the temporary exemption in which to register those exemptions it considers apply.

What are the penalties for breach?

If a landlord is found to be in breach of the MEES Regulations, any leases the landlord has granted remain valid (regulation 30). Neither the landlord nor tenant can terminate the tenancy on grounds of non-compliance and the tenant must still pay the rent, service charge and other payments under the lease. 

Should a landlord breach the letting restrictions then the financial penalties can range between £5,000 and £150,000, depending on the length of the breach and the rateable value of the property:

1. For a breach of less than three months, the fine is the greater of £5,000 or 10% of the rateable value of the property, capped at £50,000.

2. For a breach of over three months, the fine is greater of £10,000 and 20% of the rateable value of the property, capped at £150,000.