New energy regulations for commercial property

New regulations have been introduced under which it will become unlawful to rent out commercial properties that do not meet a minimum EPC rating of ‘E’.

From 1 April 2018, landlords will need to ensure that a commercial property is at the minimum energy efficiency threshold before a new lease is granted or an existing lease renewed. This will also apply to existing leases from 1 April 2023. Any breach will incur criminal liability and a penalty of between £5,000 and £150,000.

Exemptions

The changes will not apply to properties that do not need an EPC, such as listed buildings, places of worship, temporary buildings (for 2 years or less), property which is to be demolished, stand-alone buildings with a total useful floor area of less than 50m² and industrial sites, workshops and non-residential agricultural buildings with a low energy demand.

Landlords will also be exempt for five years if:

• consent for the necessary works is not available (including if, despite “reasonable efforts” by the landlord, a tenant refuses to consent to energy efficiency improvements);
• an expert states that the measures will reduce the property value by 5% or more or that wall insulation will damage the property; or
• all possible cost-effective improvements have been carried out;

and as long as any exemptions are recorded on a centralised exemptions register.

Short term lets (less than six months, as long as there has been no previous occupation and there is no right to extend) and long leases (99 years plus) are also exempt. Only tenancies or leases are caught by the new regulations – the prohibition does not apply to sales of commercial property, licences or tenancies at will.

Purchasers of commercial property may still be affected, however, as an exemption will not pass to a buyer – they will have to establish a new exemption, if available. Any improvements that will need to be carried out may also have an impact on the value of a property.

Summary

The new legislation has the potential to benefit, and also to impose burdens on, both landlords and tenants. Both should be considering the changes now when entering into a lease or lease renewal that will span the deadlines, and both should also start getting ready for this new dimension to the commercial lease landscape.

Fenella Eddell is a property solicitor at Barker Gotelee, Suffolk Solicitors

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