It may be April fools day but 1 April 2023 is also the day on which the next round of EPC Regulations come into force as part of the government's push to achieve net zero emissions by 2050.
From 1 April 2023 all rented commercial property will need to have an energy performance certificate (EPC) rating of band 'E' or better. Failure to achieve a rating of band "E" or better will see landlords face potential fines of up to £150,000.
Craig Burton, Partner in the Real Estate team at PDT Solicitors and Holly Vos, Senior Surveyor from Vail Williams, discuss the legal and practical considerations for meeting the required standards and the need to start preparing now.
The Legal Position
What does this mean for landlords?
Landlords are required by law to ensure that their properties meet the required EPC rating. Currently, all commercial property must hold an EPC rating of band 'E' or better prior to any new leases or renewals being granted. From 1 April 2023 this will be extended to all rented commercial properties. This will include properties where the leases are mid term.
Milestones to band "B" by 2030
Looking further ahead landlords also need to be aware of future proposals for the minimum standards to be increased to band 'C' by 1 April 2027 and band 'B' by 1 April 2030.
Are there any exceptions?
Whilst the new Regulations apply to all rented commercial premises (with the exception of those subject to leases of less than 6 months, or more than 99 years), limited exemptions do apply where undertaking works to improve the rating is either not possible or not economically viable. Whilst this article does not go into detail on the exemptions available, any landlord seeking to rely on an exemption must make sure to apply for, and register, an exemption. Exemptions are valid from 6 months up to five years.
What steps need to be taken?
The key takeaways for landlords are:
- Check whether your properties have a valid EPC rating of band 'E' or better.
- If this is not the case, then check when any current leases are due to expire. If the lease is due to expire after 1 April 2023 check whether you have the right to access and undertake the work under the terms of the lease.
- Check the terms of any current leases to establish whether any costs incurred in meeting the EPC rating can be recovered from the tenant.
PDT advises a range of landlord and tenant clients, from those with a single site to extensive portfolios encompassing offices, retail, and industrial space. We have a solid history of helping clients' structure, negotiate and complete commercial real estate transactions. If you need advice, please contact Craig Burton for more information.
The Practical Side
Does this apply to your building?
The new Regulations are estimated to apply to 85% of the non-domestic rented building stock. Rented buildings account for 61% of the non-domestic stock in England and Wales and they produce 37.5% of all emissions from non-domestic buildings. Interestingly, commercial, and industrial buildings greater than 1,000 m2 make up only 7% of all non-domestic buildings but they are responsible for over half of the total energy used and carbon emitted. It is important to recognise at this point that an EPC focusses on the quality of the fabric and services of a building and does not measure operational energy use.
How are the EPC assessments made?
EPC assessments are available at different levels. Commercial properties typically require a level 4 assessment, but this is dependent on the complexity of the building engineering services installed, specifically the heating, ventilation, and air conditioning (HVAC) system. The right level of assessment is essential to obtain an accurate energy rating for your property. Prior to an EPC Assessment we recommend that owners and occupiers have details readily available of the types of engineering services, windows and insulation installed, which is usually held in the operations and maintenance (O&M) manuals for the building. However, for older buildings this may not be the case and reasonable assumptions will need to be made by your assessor following their inspection.
Once the assessment is complete the recommendation report is a good place to start in establishing what additional measures or works are required to improve the energy rating of your building. Completing this exercise in advance of needing a new EPC for your property will allow you the time to plan and budget for the works required to ensure your building remains lettable at the next relevant lease event.
These works can then be incorporated into the planned preventative maintenance (PPM) schedule for your building. A PPM schedule is a useful management tool to programme and budget for works to your property, including cyclical maintenance and more significant works, such as improvement works to reach the desired EPC rating. It is designed as a working document and for multi-let buildings it can be used to assist with preparing the service charge budget.
Who pays for the works?
Building owners and occupiers need to look carefully at their leases to determine the party responsible for the building fabric and services, and therefore who should implement and pay for the improvement works. The following lease events will likely trigger these discussions:
- Agreement for lease/ fit out works
- Lease renewal
- Lease end dilapidations liability
Vail Williams can provide technical and property advice at all stages of a property's life cycle. The building consultancy team are well positioned to assist with providing pre-acquisition advice, preparing PPM schedules, implementing improvement works and advising on your dilapidations' liability for both landlords and tenants. If you need advice, please contact Holly Vos for more information.
