Commercial property with energy rating below E to be unlettable

Since 2018 it has been unlawful for a landlord to grant a new tenancy of commercial property with an EPC rating lower than E. The property must hold an EPC rating of band ‘E’ or better prior to any new leases or renewals being granted.

However, from 1 April 2023 this requirement will be extended to apply to both new and existing leases.

This will stop commercial landlords from not only granting new leases but also continuing existing leases of non-domestic properties with an energy rating below E. This will impact not only landlords, but also investors and developers.

Options for landlords are either to make ‘relevant energy efficiency improvements’ to their commercial properties - which will need to be funded - or to register exemptions for them on the PRS Exemption Register. If they do neither, and continue to let a property with only an F or G rating, this will be deemed as a criminal offence.

Exemptions to the regulations:

Exempt properties include:

• industrial sites
• workshops with low energy demands
• temporary and religious buildings

There is also an exemption from making improvements if the landlord registers that it has a legitimate reason for failing to improve the property’s energy rating to E or above.

Legitimate reasons include the following:

• the landlord can show that it is not possible to make relevant energy efficiency improvements;
• all relevant efficiency improvements have been made, but the property still does not merit an E rating;

• the ‘devaluation exemption’ - the landlord must show that they have not been able, within the last five years, to increase the energy rating because the improvement would reduce the market value of the let property by more than 5%. If this is the case, the landlord must register the necessary information on the PRS Exemptions Register in advance of applying for the exemption;

• the ‘consent exemption’ - the landlord must show that they have not been able to increase the energy rating within the last five years because of a prescribed situation. If this is the case, the landlord must register the necessary information on the PRS Exemptions Register in advance of applying for the exemption.

An example of this is where either a tenant has refused to consent to do the relevant energy efficiency improvements, or, third party consent is required and, despite reasonable efforts by the landlord, that consent has been refused or been

granted subject to a condition, which the landlord cannot reasonably comply with.

Steps to be taken:

Commercial landlords who own properties with an energy rating below E should be identifying which improvements need to be made, and how those can be funded – for example, through increased service charges or rents, or whether landlord contributions are required, in good time before the new rules come into force.

Landlords should therefore be opening communications with tenants and third parties whose consent is required, to determine whether it will be given or not and, if not, whether an exemption applies.

Landlords should also be considering in advance how to fund any improvements they plan to make, whether through additional service charges, increasing rent or through contributions from the landlords themselves.

CONTACT US

To discuss Commercial Property issues, please either use the contact form on this page, email us at info@ramsdens.co.uk or call us on 01484 821 500 to speak to a member of our team.