The government has announced that by 2030 it may be unlawful to continue to let a non-domestic property with an EPC rating of below B
This announcement comes as part of the government's package of measures to reduce carbon emissions.
What will change?
Since 1 April 2018, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES Regulations) have made it unlawful for landlords to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property), unless an exemption applies and has been validly registered. From 1 April 2023, it will be unlawful for a landlord of sub-standard non-domestic premises to continue to let those premises unless an exemption applies and has been validly registered.
It has long been the intention to raise the minimum requirement from E, and it had been thought that properties with ratings of below C would be targeted for improvement.
The government estimates that moving the minimum standard to B would bring 85% of buildings into scope, compared with 42% if the move was to C. Government modelling suggests that 64% of buildings will be able to reach a B rating, with 20% failing to meet a B rating, but able to reach a C rating. The remaining 17% would be unable to reach a C rating.
The government's clear preference is for properties to be improved to B ratings. However, views are sought on whether we should be setting the minimum rating at B or C.
One implementation date or incremental milestones?
The consultation seeks views on whether we should have one date for implementation or a series of dates by which incremental improvements must have been made.
If the 'drop dead' date option were adopted, it would be unlawful to continue to let any non-domestic buildings that had not reached a B or C level (depending on which was adopted) after 31 March 2030. The existing exemptions would still apply so, if, for example, requisite works did not satisfy the seven year payback test, they would not need to be done. However, it is likely that, in most cases, some works would be required to improve the property's energy efficiency, even if they did not result in a B or C rating.
In order to rely on this exemption (or any other), it would need to be validly registered. Given the percentage of building stock that would be affected by the increase in the minimum requirement to a B or C rating, it is likely that a huge number of landlords would need to register exemptions.
Having one 'drop dead' date may lead landlords to delay in carrying out energy efficiency works. Why do it now when you could wait until 2030? In addition to delaying improvements in the energy efficiency of our building stock, it may also place an unnecessary burden on suppliers and installers. This could be avoided if there were a series of deadlines in the run up to 2030.
Examples are set out in the consultation. The example given for reaching a B rating is:
- All privately rented non-domestic buildings cannot be newly rented, or have their lease extended or renewed, unless they have achieved an EPC D by 2024, an EPC C by 2026 and an EPC B by 2028. By April 2030, non-domestic privately rented buildings cannot continue to be rented out unless they achieve an EPC B.
- All privately rented non-domestic buildings cannot continue to be rented out unless they have achieved an EPC D by 2025 and an EPC C by 2028. By April 2030, non-domestic privately rented buildings cannot continue to be rented out unless they achieve an EPC B.
It is not clear how these incremental deadlines would work within the current EPC regime. Presumably the landlord would be obliged to get a new EPC prior to each deadline, even if the EPC was in its 10 year validity period. This would be required to show the improved rating. If the rating did not reach the prescribed level, the landlord would need to register an exemption (if applicable).
This requirement for multiple EPCs will be an added cost for the landlord and could also lead to pressures on EPC assessors.
What about tenant fit out?
As is currently the case, it will be the landlord's obligation to ensure that the premises meet the minimum energy efficiency requirements before letting them. It is the landlord that will be in breach if they let sub-standard premises. The consultation acknowledges that this can be an issue in some sectors. It mentions the retail sector, but the problem is not specific to retail properties.
In order to comply with the MEES Regulations, the landlord may have to install measures to bring the premises up to the required EPC rating before granting the lease. However, the tenant may immediately remove these measures so that it can fit the premises out as it requires.
There are two issues here. Firstly, the landlord is wasting time and money on carrying out works merely to comply with the MEES Regulations when these measures will be removed by the tenant. If the landlord has to spend money to improve the premises to the required level, it will pass this expenditure on to the tenant by way of an increased rent. This problem will become more widespread when the minimum energy rating is increased (whether that is to C or B).
Secondly, the tenant's fit out could reduce the EPC rating of the premises, putting the landlord at risk of breaching the prohibition on continuing to let a sub-standard property. This is already acknowledged as a problem in the market. However, it will become more widespread when the minimum rating is increased.
The consultation seeks views on how the market can overcome situations where the tenant has fit-out requirements and is willing to fund the improvement of the building at the start of the tenancy.
What else is the government doing?
The government acknowledges that the EPC does not reflect improvements in operational performance. In 2020, it will be consulting on introducing mandatory in-use energy performance ratings for non-domestic buildings in the private sector. We will report on this consultation when it is released.
The government's commitment to improving the energy efficiency of our building stock is admirable. However, there are problems to be ironed out with the operation of the MEES Regulations. Hopefully, these practical issues will be addressed during the consultation process.