Commercial Property Energy Performance Regulations

Tenants of manufacturing and industrial premises should be aware of recent changes to regulations affecting commercial premises, which could provide cost savings on utilities but also lead to tenants and landlords negotiating issues relating to scope and timing of any works needed to improve the property.

As from 1 April 2018, Part 3 of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES regulations) introduced a prohibition on a landlord of ‘sub-standard’ commercial property (those that have an EPC rating of Band F or G) from granting a new tenancy. As from 1 April 2023 a landlord will be prohibited from continuing to let commercial premises that are ‘sub-standard’.

What does this mean for industrial tenants?

The regulations have been introduced to incentivise landlords to make energy efficient improvements to let property which is currently sub-standard and should therefore yield advantages for those tenants occupying these premises. Where a company is occupying sub-standard commercial premises on a lease that will not end before 1 April 2023, the landlord will need to make improvements to the property’s energy efficiency in order to continue to let it, if the property falls within the scope of regulations.

Where improvements are required, the landlord will need to communicate with the tenant and there may need to be some negotiations between the two parties. For instance, it would clearly be to the tenant’s advantage for any improvement works to be undertaken by the landlord sooner rather than later, so the benefit of utility cost savings is brought forward. Subject to the extent of the works required to bring the premises up to an EPC rating of E and the disruption this might cause to operations, the works are likely to need to be carefully planned so as not to impede the tenant’s operations.

A tenant whose strategy sees the business staying at the premises for the long-term may also wish to enter into negotiations as to the extent of the improvements. A landlord will only be required to bring the property up to an EPC rating of E, but a tenant with an intention to remain in the property for the long-term may be interested in having the property brought up to a standard higher than an E banding. This and related issues of contributions by the tenant, or the impact of the landlord’s investment on future rent reviews, are issues for negotiation between the tenant and the landlords.

Non-compliance

A breach of the MEES regulations potentially exposes a landlord to enforcement action by the local Trading Standards officers. Enforcement may be financial penalties and/or the entry of the details of the breach on the PRS Exemptions Register.

Which properties will be affected?

It is important to note that not all commercial properties will be subject to these Regulations. The MEES regulations defines commercial properties falling within the scope of the Regulations as:-

1. Requiring an EPC,
2. Within England and Wales,
3. Let on a qualifying tenancy, and
4. Not a dwelling.

Item 1) above will be an important consideration for some manufactures and engineering companies as an EPC is not required for some industrial premises, namely those falling within the category of: ‘an industrial site, workshop or non-residential agricultural building that doesn’t use much energy.’ However, where a property is part industrial/warehouse (unheated) and part office (heated), the property will require an EPC and therefore will fall under the scope of the new Regulations, although the heated office area will be the primary focus of the EPC assessment.

Manufacturers also need to bear in mind that the MEES regulations do not include a definition of ‘tenancy’, so the individual circumstances surrounding each letting need to be factored into account in order to determine whether a tenancy has arisen or not and therefore whether their premises will be subject to compliance with the new regulations. For example, it is generally considered that the grant of a licence will not be classed as the grant of a tenancy and therefore not be a trigger for compliance with the MEES regulations.

The MEES regulations will only apply to a commercial property that is ‘sub-standard’. The current benchmark is a property with a EPC rating of F or below. If the property has a rating of E or above then the MEES regulations will not apply and therefore there is no obligation on the landlord to make improvements.

Under the Regulations, even where a property is considered ‘sub-standard’, a landlord may be excluded from be required to make improvements where:

• An independent assessor determines all relevant energy efficiency improvements have been made to the property or that improvements that could be made but have not been made would not pay for themselves through energy savings within seven years.
• An independent assessor determines relevant energy efficiency improvements that could be made to the property are likely to reduce the market value of the property by more than 5%.
• Where consent from persons such as a tenant, a superior landlord or planning authorities has been refused or has been given with conditions with which the landlord cannot reasonably comply.  

The MEES regulations do not prohibit the landlord from recovering the cost of any required works from the tenant. As mentioned above, negotiations are likely to be necessary between the parties where works recommended by an EPC assessment to bring a property up to an E banding are larger in scope. It would be prudent for tenants to carefully review their tenancy agreement contracts to determine whether a landlord could, if they wish, seek financial recovery for improvements and it would be recommended that this review was undertaken sooner rather than later so that all options can be explored and a strategy for potential negotiation assumed.

Our team can advise on all elements of your commercial property. For more information contact Holmes & Hills Solicitors on 01376 320456 (Essex) or 01787 275275 (Suffolk).