Changes to Minimum Energy Standards for Commercial Property

What does this mean for commercial properties?

• From 1 April 2023, it shall be unlawful for landlords to continue to let commercial properties with an energy performance rating of “F” or “G”, unless certain exemptions apply.
• In respect of breaches, penalty start at £5,000 for one off infringement of less than 3 months. For breaches lasting longer than 3 months, the penalty is based on the rateable value of the property and will be between £10,000 – £150,000 per breach. Details of the breach may also be made publicly available.

What does this mean for residential properties?

• Since 1 April 2020, it has been a requirement for landlords of residential property to comply with MEES Regulations by ensuring that there is a valid EPC in place confirming that the property has attained a minimum energy efficiency rating of “E” .
• Any landlord who breaches this requirement will be exposed to a civil fine of up £5,000.
• The landlord cannot serve a section 21 notice unless a valid EPC has been provided to the tenant at any time before the service of a section 21 notice.  

What does this mean for listed buildings and buildings in conservation areas?

• Listed buildings and buildings in conservation areas are not automatically exempt from MEES Regulations.  
• The MEES Regulations are not clear in that they state that such buildings are exempt only “in so far as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance”.
• In order to determine whether a building is exempt, a property owner must seek specialist advice and form their own view whether the recommended energy efficiency improvement measures would “unacceptably alter the character or appearance” of the property. Further guidance issued by the Government suggests that property owners should also consider seeking advice from their local authority’s conservation officer.
• Following confusion surrounding the EPC requirements for older buildings, the Government has proposed that in the future there will be a requirement for listed buildings and those in conservation areas which are to be rented to have an EPC.

What is the PRS Exemptions Register?

MEES Regulations provide that a number of exemptions are available to landlords of commercial and residential premises, although in order to claim an exemption the landlord must first enter the relevant details on the PRS Exemptions Register. Examples of the types of exemptions available to landlords are set out below:-

1. ‘High costs’ Exemption – The prohibition on letting property below an EPC rating of “E “ does not apply if the cost of making even the cheapest recommended improvement would exceed £3,500 (inc. VAT). Applies only to domestic property
2. ‘7 Year Payback’ Exemption – Where a recommended measure is not a “relevant energy efficiency improvement” because the cost of purchasing and installing it does not meet the 7 Year Payback test. Applies only to non-domestic property.
3. ‘All Improvements Made’ Exemption – Where all the “relevant energy efficiency improvements” for the property have been made (or there are none that can be made) and the property remains sub-standard. Applies to domestic and non-domestic property.
4. ‘Wall Insulation’ Exemption – If the property contains a certain type of cavity or other wall insulation, there may be an exemption. Applies to domestic property.
5. ‘Devaluation’ Exemption – the landlord has obtained an independent valuation which advises that making the relevant improvements would reduce the market value of the property, or of the building where the property is situated, by more than 5%. Applies to domestic and non-domestic property.
6. ‘New Landlord’ Exemption – this is a temporary exemption due to recently becoming a landlord. Applies to domestic and non-domestic property.

Exemptions will last 5 years (with the exception of the New Landlord Exemption which lasts for 6 months); after this time it will expire and the landlord must try again to improve the property’s EPC rating to meet the minimum level of energy efficiency.  If this cannot be achieved then a further exemption may be registered.

Note also that if a property is sold/transferred which is on the PRS Exemptions Register, the exemption will cease to be effective and the new owner will need to either improve the property to the minimum standard at that point, or register an exemption where one applies, if they intend to continue to let the property.

What do lenders need to consider now?

1. The cost of improvements to bring the sub-standard property up to an EPC rating of “E”, unless the property is registered on the PRS Exemptions Register.  
2. Loss of income as the property cannot be rented out until the works are carried out.
3. Consider whether consents are required from third parties, for example, if the property is leasehold and the potential impact on the cost and timetable for the works.
4. Your borrower is committing an offence if they continue to rent a property which does not comply with MEES Regulations.

Future considerations:

A Minimum Energy Performance of Buildings Bill is going through parliament now which suggests the following requirements are expected to be made law in the near future:

1. All domestic properties must have an EPC band “C” by 2035, where practical, cost-effective and affordable.
2. All new tenancies of privately rented property  must have an energy efficiency performance of at least EPC band “C” from 31 December 2025.
3. All existing tenancies of  privately rented properties must be at least EPC band “C” from 31 December 2028.
4. All mortgage lenders must by 31 December 2030 ensure that the average energy performance level of their domestic portfolios is at least EPC band “C”.
5. That all rented non-domestic buildings must be EPC “B” by 2030, subject to certain exemptions.

Please do get in touch if you have any further questions, or would like to discuss further.