On 1st April 2023, the Minimum Energy Efficiency Standards (as measured by reference to the rating of the energy performance certificate of a property) will tighten again so that, with limited exceptions, the minimum rating for all properties let or to be let becomes “E” (Currently existing leases which are F or G rated are permitted – only new leases need to be rated “E” or better).

Now that these new provisions are imminent, what could this mean for commercial landlords and tenants and what can they do to ensure they are not caught out?

Potential Impact

1. The financial penalties for breach could be significant:

• Where the period of the breach is less than three months the penalty is the greater of £5,000 or 10% of rateable value of the property at the date of service of the penalty notice, up to a maximum of £50,000.
• Where the period of the breach is three months or more the penalty is the greater of £10,000 or 20% of rateable value of the property at the date of service of the penalty notice, up to a maximum of £150,000.

2. Where a landlord is found to be non-compliant, the adverse publicity and reputational damage could be a material concern.
3. An existing tenant will need to be aware of breach too. A breach of the regulations will not affect the validity of a tenant’s lease but from 1 April 2023, a tenant will not be able to sub-let or continue to sub-let unless the EPC rating is at least an E rating or it has claimed an exemption.
4. In the context of increasing costs, particularly utility costs, the EPC rating of a property and the flexibility of sub-letting and alterations provisions are going to be increasingly important in attracting and keeping tenants and driving rents and investment value. From 1 April 2027 it is likely that properties will need to have an EPC rating of C before being let increasing to a B rating by 1 April 2030.
5. Following on from point 4 above, increasing costs may force some landlords or tenants to the market. This may provide opportunities for well-capitalised investors.

What can landlords and tenants do?

1. Identify let/sub-let properties with an EPC rating of F or G or properties with no current EPC and obtain them where necessary.
2. Consider whether any let/sub-let properties with an EPC rating of F or G can be registered or renewed on the PRS Exemptions Register.
3. Check any relevant leases to see if any tenant or 3rd party consents are needed for improvements and whether any costs are recoverable. Make the necessary applications for consent where required.
4. Timescales are now short but, if no exemptions can be registered or renewed, plan and implement the relevant improvements before 1 April 2023 liaising with the tenant and third parties as appropriate.
5. Following on from points 1 – 4 above, if considering a sale, get your house (or rather commercial property!) in order. As well as ensuring the appropriate EPCs are in place, take the time to review other documentation to produce as clean a sales pack as possible to pave the way for a smooth transaction.
6. Green your leases. Consider the need for energy efficiency and flexible sub-letting provisions in new leases at heads of terms stage and consider variations to existing leases or entering into a memorandum of understanding for existing leases. For too long these provisions have been seen as a hurdle to the quick conclusion of a transaction. Increasingly there is a change in perception -increased costs are squeezing both landlords and tenants providing incentives for both parties to futureproof leases and incorporate these provisions.

How can we help?

1. We can input into heads of terms for new leases or lease variations; working closely with your appointed surveyors.
2. We can prepare and negotiate green leases or lease variations on your behalf.
3. We can review title to properties and sales packs ahead of marketing to highlight and deal with any issues which might delay or protract a sale.
4. We know lots of friendly surveyors and are happy to make recommendations as required.

If you have any questions regarding commercial property, please do not hesitate to get in touch with Jonathan or another member of the team.