34% of commercial properties could be un-lettable from April 2018 due to changes in EPC rating

As of April 2018 it will be mandatory for commercial properties to have a minimum of an E rating in its Energy Performance Certificate ("EPC") before they can let.

The requirements are compounded by changes to the Building Regulations that came into force on 6 April 2014 which mean that properties that have already been assessed for an EPC may well be given a lower asset rating if a new EPC is triggered and the property is reassessed. As a result, a property that currently has a rating of E could be downgraded to an F; taking it into the category where a new lease cannot be granted after April 2018 unless specific energy efficiency improvements are made first or another exemption applies.

If a property fails to meet these new standards and are continued to be let then a "penalty notice" will be served. If the "penalty notice" is served when the landlord has been in breach for less than 3 months, the financial penalty cannot exceed the greater of (a) £5,000, and (b) 10% of the rateable value of the property, subject to an absolute limit of £50,000. If the breach has been continuing for 3 months or more, the corresponding numbers are, respectively £10,000, 20%, and £150,000. Appeals against these penalties and their amounts are possible.

Excluded Buildings

Buildings that are excluded from the scope of these requirements:

• Buildings and monuments officially protected as part of a designated environment or because of their special architectural historical merit insofar as requirements with certain energy efficiency requirements would unacceptably alter their character or appearance. This includes listed buildings.
• Temporary buildings with a planned timed use of 2 years or less.
• Residential buildings which are intended to be used less than 4 months of the year.
• Stand alone buildings with a total usable floor area of less than 50 square meters.
• Buildings which are not required to have an EPC such as industrial sites, workshops, non-residential agricultural buildings with a low energy demand.
• Buildings where the EPC is over 10 years old or where there is no EPC
• Tenancies of less than 6 months (with no right of renewal).
• Tenancies of over 99 years.

Exempt Landlords

Only appropriate, permissible and cost-effective improvements are required under the regulations. Landlords will be eligible for an exemption from reaching the minimum standard where they can provide evidence that one of the following applies:

• The landlord has undertaken improvements that are cost-effective but the building remains below an E EPC rating. Cost-effective measures are those improvements that are capable of being installed within the Green Deal's Golden Rule. [This ensures that landlords will not face excessive upfront costs for the improvement works.]
• The landlord is unable to install those improvements that are cost-effective without upfront costs because the funding entails Green Deal Finance, and they or their tenant fail the relevant credit checks.
• The landlord is required by a contractual or legislative obligation to obtain a third party's consent or permission to undertake relevant improvements relating to the minimum standard, and such consent was denied, or was provided with unreasonable conditions.
• The landlord requires consent, and the occupying tenant withholds that consent.
• Measures required to improve the property are expected to cause a capital devaluation of the property of more than 5%.
• Where installation of wall insulation is would have a negative impact on the fabric or structure of the property (or the building of which it is part).

All exemptions will be required to be notified to the PRS Exemptions Register which is planned to open from 1 October 2017. However exemptions only endure for 5 years after which they will be reviewed, and they cannot be transferred to a new landlord.

Practical Steps for Landlords to Take

In light of these changes there are some precautionary steps that can be taken.

1. Put an energy efficiency plan into place where a building has an EPC rating of F or G
2. Ensure you understand how your lease terms, break dates, renewals and planned refit periods fit with the timetable of the legislation
3. Consider adding specific EPC related clauses to new leases which:
   1. Allow you entry to the premises to carry out energy efficiency works;
   2. Allocate responsibility (as far as you are able to negotiate with the Tenant) for the costs of these works to be shared between Landlord and Tenant;
   3. Consider "greening" up your leases and promoting collaboration between landlords and tenants when it comes to improving the energy efficiency of tenanted buildings (http://www.betterbuildingspartnership.co.uk/green-lease-toolkit).