Energy Efficiency – A Time-Bomb For Landlords Of Commercial Buildings

Landlords of many commercial buildings may not know it, but they could be sitting on a time-bomb.

At the moment (subject to exceptions) a landlord must not let a building that does not comply with the minimum required energy efficiency standard, which the regulations originally set at an ‘E’ rating on a valid Energy Performance Certificate (EPC). Many landlords may be relaxed, knowing their buildings are rated ‘E’ or better for energy efficiency.

They may not be relaxing for much longer, as the Government has recently set a target of lifting the minimum energy efficiency standard in relation to let non-domestic buildings to ‘B’ by 2030.

Implementation of the EPC B target by 2030

The Government estimates that the implementation of the EPC B target will cover around 85% of the UK’s non-domestic rented stock and will help the UK achieve its target of net zero carbon emissions by 2050.

According to data published by the Department for Business, Energy & Industrial Strategy (within their 2019 report entitled, ‘The Non-Domestic Private Rented Sector Minimum Energy Efficiency Standards‘):

“Business and industry are responsible for over a quarter of UK emissions, a significant proportion of which are created through businesses’ demand for energy. The majority of that energy is used to heat the buildings they occupy: of the total energy consumed by UK businesses in 2014-15, 52% was used in maintaining the non-domestic building stock.”

The Government says proposals to set minimum energy efficiency standards at EPC band B by 2030 could:

“…reduce UK emissions by the equivalent of half a million homes – roughly the size of Birmingham”.

Open consultation on changes to the Minimum Energy Efficiency Standards (MEES) Regulations in the commercial sector

The Department for Business, Energy & Industrial Strategy has now published an open consultation on changes to the Minimum Energy Efficiency Standards (MEES) Regulations in the commercial sector, entitled ‘Non-domestic Private Rented Sector minimum energy efficiency standards: EPC B implementation‘.

As stated in the open consultation report, the Government proposes a phased implementation of the ‘B’ minimum standard by setting an interim milestone in 2027 for a minimum standard of ‘C’, but the way in which it proposes to do this needs to be analysed.

The Government currently estimates that around 10% of non-domestic let buildings are below the ‘E’ rating. As from 1 April 2023, a landlord can only lawfully continue to let a non-domestic building if the building has an energy rating of ‘E’. It is possible that in the period after 2023, the landlord’s building does not have a valid EPC because, although one was obtained when the lease was granted, it has expired. EPCs only have a 10 year lifespan.

As part of its package of measures, the Government intends to alter this so that a building must always have an up-to-date EPC during the whole time that it is let. This would cover cases of lease renewal where current guidance suggests that an EPC is not necessary where an existing tenant is renewing its lease.

Compliance Windows

The Government is proposing two ‘Compliance Windows’ in the second half of this decade, which are as follows:

The first Compliance Window from 2025 to 2027

From 1st April 2025, all non-domestic rented buildings within the scope of the MEES regulations would have to have a valid EPC (meaning that if one had expired, a new one must be obtained). The paper talks about a requirement for a landlord to “present” a valid EPC by 1st April 2025. This means that the landlord will have to submit its EPC to an online Private Rented Sector compliance and exemptions database, which will “…then ‘start the clock’, creating a clear time period within which landlords will be expected to undertake improvements if they have not done so already.

From 1st April 2027, the minimum required rating would increase to ‘C’, so that landlords must have improved the building by then, or have registered a valid exemption. If the building already possessed a ‘C’ rating at April 2025, the landlord would be in compliance with the regulations. However, if not, the landlord would have to present a new EPC with its ‘C’ rating by 1st April 2027, or register an exemption.

The second Compliance Window from 2028 to 2030

A landlord would have to present a valid EPC by 1st April 2028 and from 1st April 2030, the minimum rating would increase to ‘B’. If the building already possessed a ‘B’ rating at April 2028, the landlord would be in compliance. However, if not, the landlord would have to present a new EPC with its ‘B’ rating by 1st April 2030, or register an exemption.

A move away from enforcement at the point of letting

This ‘four juncture’ approach is a move away from enforcement at the point of letting.

Dispensing with compliance at the point of letting will assist with the ‘shell and core’ problem. In new ‘shell and core’ lettings, where a landlord lets a unit in a stripped-out condition, with the tenant to fit out (including installation of heating and lighting), at the point of letting, an EPC for the building is likely to give an ‘F’ or ‘G’ rating, thereby making it unlawful for the landlord to let.

Options for compliance would include either the tenant obtaining early access to fit out, or the landlord installing items which the tenant then replaces. While the proposed new framework for compliance would still require a landlord to hold a valid EPC at the point of letting, for the purposes of complying with the MEES Regulations, the building would simply need to achieve a ‘C’ rating by 2027 and a ‘B’ rating by 2030, regardless of when it was let.

For those lettings occurring close to a compliance date, a specific exemption could be introduced. Hence, the Government is proposing to enforce MEES only once a unit is fully operational and has been occupied for at least six months. However, the tenant’s fit out may have a significant impact on the final EPC rating, and thus on compliance. The Government is therefore considering ways in which tenants can take on a share of the legal responsibilities in relation to MEES by imposing duties upon them.

The consultation runs until 9th June 2021. The Government proposes to publish a response later in 2021 and to lay amending regulations to have effect from April 2025.

EPC B 2030How Nelsons can help

Martin Jinks is a Partner and Notary Public in our expert Commercial Property team.

If you have any questions in relation to the subjects discussed in this article or any related topics, please contact Martin or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.