Commercial Property - The deadline looms

In our previous newsletter we warned that the deadline for the latest changes brought in by the Minimum Energy Efficiency Standards (MEES) with regards to existing commercial leases was 1st April 2023. With this deadline looming, it is becoming apparent that many commercial landlords may not be prepared for the change.

As a reminder, the current position is that commercial landlords cannot grant a new lease if the EPC rating of a property is below an E. From 1st April 2023, this rule will apply to all continuing / existing leases as well as new ones. As such, from this date onwards all commercial properties must have an EPC rating of no less than an E unless you have registered a valid exemption.

It is worth noting that the maximum penalty per breach could be £150,000 and / or the details of the breach could be published on a public register. This could clearly mount up over a portfolio if you haven't taken preventative measures.

If no action has been taken to date, then you should consider if there is a valid exemption for the commercial property in question. You may be able to claim an exemption if any of the following apply:

• You have carried out all cost-effective improvements that you can and yet the EPC rating remains below an E rating.

• You would carry out the necessary improvement work, but you have been prevented from doing so by lack of a third-party permission (such a declined planning application) or you have permission but the conditions attached to it are unreasonable.

• If you did carry out the necessary improvements then it would lead to a capital devaluation of the property of more than 5%.

• Any improvements would fail the 7-year payback test. That is where the value of savings on energy bills brought about by the improvements over a period of 7 years are less than the cost of the works.

• The wall insulation exemption applies. The regulations recognise that even if wall installation systems have been recommended for a property, they may not be suitable. A recommended improvement is not considered to be suitable where it is:

  • cavity wall insulation, external wall insulation or internal wall insulation (for external walls), and

  • where you have obtained written expert advice indicating that the measure is not appropriate for the property due to its potential negative impact on the fabric or structure of the property.

Most of these exemptions are only valid for 5 years after which, you will need to try again to improve the EPC rating of the property to meet the minimum levels.

That might sound reasonable enough, but it is worth remembering that at present, the government plans are for the minimum EPC ratings to rise to a C in 2027 and a B in 2030. So, you may be able to apply for an exemption now but if the minimum ratings do increase as planned then there is no guarantee that when that exemption expires you will be apply to obtain another if the property still cannot be improved. If you haven't already done so, then it may be time to look further into the future when it comes to your commercial property portfolios and their energy efficiency.