Worthing Newsletter – January 2019

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Energy Performance Certificates Essentials for Commercial Properties

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (“MEES Regulations”) were introduced with the intention to improve the energy efficiency of privately rented properties.

MEES Regulations prohibit the grant of new qualifying leases of commercial (referred to as “non-domestic” in the MEES Regulations) privately rented property on or after 1 April 2018 if the property falls below a minimum energy efficiency standard (“MEES”) in certain circumstances.  It also will apply to existing leases of non-domestic private rented properties on or after 1 April 2023.

However before you can consider how the MEES Regulations might affect your property, you need to first establish whether your property is exempt and, if not, if you either have a valid Energy Performance Certificate (“EPC”) in place or whether there will be a “trigger” to have an EPC commissioned in accordance with the Energy Performance of Buildings (England and Wales) Regulations 2012 (2012/3118) (“EPC Regulations“).

How do I know if my property is exempt or not a “non-domestic private rented property”?

Certain types of property can be exempt from the requirement to have an EPC.  The most common are properties which use no energy which condition indoor climate, industrial units with low energy demand and in certain circumstances, listed building and buildings in a conservation area.

How can I check if there is an existing EPC for my property?

You can check online by searching the non-domestic EPC Register: https://www.epcregister.com/

Please note though that this does not include every EPC that might exist as EPCs can be “opted-out” from public disclosure.

Generally an EPC is valid for 10 years or until a new EPC is prepared for the property,

What transactions can trigger the requirement for an EPC to be commissioned? 

  • A sale or renting out a property.  It is irrelevant if the tenant or buyer does not care about the EPC i.e. sales to friends or family or sale of low value
  • A building under construction is finished
  • There are changes to the number of parts used for separate occupation and these changes involve providing or extending fixed heating, air conditioning or mechanical ventilation systems

Note that there is a separate requirement to display an EPC if (1) the total useful floor area is over 500 sq. metres, (2) the building is frequently visited by the public and (3) an EPC is already in existence.  The EPC will give a rating of the energy efficiency of the property using a banding system with band ‘A’ being the most energy efficient and band G being the last energy efficient.

You can arrange to have the energy efficiency of a property assessed by an accredited energy assessor, who will produce an EPC for a fee.

What transactions are not considered sales or lettings? 

Unfortunately there is no express list of exclusions.  However there is guidance available that indicates the following are not included:

  • Compulsory purchase transactions
  • Sale of shares in a company which owns property
  • Lease surrenders
  • Not-for-value transactions

The position with lease extensions and renewals to the same tenant is unclear as the guidance on the MEES Regulations and the EPC Regulations conflict so each case will need to be considered on its circumstances.

At what point in either the sale or rental transaction is the requirement to commission an EPC triggered?

  • Prior to marketing a sale or letting – the EPC rating must then be put in any advertisements of the property; or
  • When there is deemed to be a prospective buyer or tenant.

There are limited legitimate excuses for not making an EPC available i.e. the transaction is not a sale or letting or the property is exempt.

The EPC must be provided free of charge therefore the tenant or purchaser should not be required to contribute towards the cost.

If a valid EPC exists (whether as a result of a trigger or otherwise) – what impact will the MEES Regulations have on me and my property?

The MEES is currently band E or above however this may be reviewed and changed in the future.

It is worth considering whether action needs to be taken sooner rather than later if the property you let or intend to sell is below the required MEES i.e. the valid EPC for the property is either band F or G.  Some examples as to why are as follows:

  • in order to improve the property to meet the MEES (currently E or above) you might need to budget for improvement costs;
  • costs of the improvement may not be reimbursable by the tenant;
  • enforcement action could be taken for non-compliance such as a fine based on the rateable value of the property rising in increments the longer the property fails to meet the MEES (capped at £150,000); and
  • public exposure for failure to comply with MEES Regulations.

All of which could impact on:

  • the marketability and value of the property;
  • the rent that tenants are prepared to pay (compared to a property which has a higher energy efficiency rating); and
  • the amount a lender is prepared to lend due to a decrease in value of the property and risk associated with uncertainties connected to the improvement costs necessary for the property to meet the MEES.

If the property is deemed to not meet the MEES (and exemptions do not apply) after an assessment then in order for the landlord to lawfully rent out the property (or continue on the existing lease of the property after 1 April 2023) the landlord will need to make improvements.  Improvements must qualify as a ‘relevant energy efficiency improvement’.  For instance such relevant energy efficiency improvements are mentioned in the recommendation report (which is within the EPC).

There are some exemptions and legitimate reasons for non-compliance.  If you are to rely on an exemption, prescribed information must be uploaded to the PRS Exemptions Register to avoid enforcement action.  If a lease is granted despite non-compliance with the MEES Regulation, then it will not invalidate the lease but it will incur a risk of the implications noted above.

Are there any exemptions to the MEES Regulations?

There are exemptions to the prohibition on letting or continuing to let properties with energy ratings below the MEES set out (briefly) below:

  • Third Party Consent – if in the proceeding 5 years, the landlord has been unable to increase the energy rating to the MEES (or higher) because of prescribed reasons and the landlord has registered prescribed information regarding this in the PRS Exemptions Register (in advance of relying on the exemption). Examples of prescribed reasons could include the tenant’s refusal to make proposed relevant energy efficiency improvements or a third party’s consent to carry out the works is not attainable/ has been refused (subject to reasonable efforts being made).
  • Property Devaluation Exemption – if in the proceeding 5 years, the landlord has obtained a surveyor’s report reporting that the relevant energy efficiency improvements would result in a 5% reduction in the market value of the property and or building and the landlord has registered prescribed information in the PRS Exemptions register
  • Exemption due to recently becoming a landlord – this temporary exemption can apply in prescribed scenarios such as the landlord purchasing a freehold interest subject to an existing tenancy, the exercise of right to take an overriding lease (i.e. a guarantor) or a lease is created by operation of law. As above, the landlord must register prescribed information in advance of relying on the exemption in the PRS Exemptions Register.

In order to claim an exemption the landlord will need to enter their details on the PRS Exemptions Register to avoid enforcement action.  The exemptions are personal (cannot be passed to successors in title) and they are also time limited.

If all the relevant energy efficiency improvements have been carried then this can take effect as an ‘exemption’ although not specifically referred to as such.  However the energy efficiency improvements need to satisfy certain conditions to be qualify as ‘relevant’ and this would need exploring in more detail to determine if the improvements meet the conditions.

A Risky Strategy

The absence of an existing EPC may be helpful to a landlord who suspects their property might be below the MEES.  This is because the MEES regime will not apply if there is no valid EPC.  Therefore if there is no requirement to obtain an EPC and if the letting term extends beyond the trigger date of 1 April 2023 this could delay the need to carry out relevant energy efficiency improvements.

If this is a strategy you wish to use, bear in mind that a third party such as a tenant could possibly commission an EPC (causing the MEES Regulations to apply).  The tenant may be restricted from doing so by the terms of the lease but this will not invalidate an EPC if the tenant commissions one in breach of their lease terms.

Annie Webb

Property Solicitor

Bennett Griffin LLP

Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring.  Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered, and practical manner. Please contact our commercial property department on 01903 229 999 or by email at info@bennett-griffin.co.uk for advice and assistance.

Please note this article does not constitute legal advice.