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Commercial landlords: is your investment property sustainable?

Commercial landlords and property agents alike might be surprised to discover that from April 2018 it may be unlawful to let non-domestic property with an Energy Performance Certificate rating lower than E. The Energy Act 2011 sets minimum energy performance standards (MEPS) that must be met for all privately rented non-domestic properties that have (or require) an Energy Performance Certificate rating. Owners of non-domestic properties with an Energy Performance Certificate (EPC) rated F or G will be prohibited from granting new tenancies, including renewals, until certain qualifying improvements have been carried out to the property.

The rules are set to become stricter from April 2023 when properties already subject to a lease will be within the scope of the minimum energy performance standards.

There is potential that properties with an EPC rating of E could in the future be caught by MEPS if the Government chose to raise the minimum standard, or if the calculations used to set energy ratings are modified.

Failing to take action on poorly rated properties poses a significant risk to landlords, with penalties beginning at £5,000 and rising to £150,000, and many will find they can no longer lawfully let their properties unless the work necessary to improve the rating has been carried out. However, the work must be deemed cost effective and there are exemptions. There may also be circumstances where existing tenants will be responsible for the costs or obliged to make a contribution under existing lease terms, although the liability in this instance is less certain and likely to be an area of litigation in the coming years.

The implementation of MEPS will have a wide-ranging effect on the commercial letting market and at present many tens of thousands of properties are likely to be affected by the new rules from April 2018. Property investors considering a purchase of commercial property are becoming warier of inefficient properties given their higher energy bills and the forthcoming restrictions on letting. The same can be said for prospective tenants who now often look for energy efficient properties for their business or demand a lower rent for particularly inefficient properties.

MEPS are part of the Government’s strategy to improve the energy efficiency of existing buildings to help meet the UK’s climate change obligations. Whilst implementing qualifying improvements will cost landlords in the short term, it is intended that the initial outlay in improving the energy rating of a non-domestic property will be offset by reduced energy bills over the life of the improvements made.

For advice on your commercial property and whether it is affected by the minimum energy performance standards please speak to William Warnock (Bar Graduate Lawyer) in our Poole office, Denise Oatham (Partner) in our Southampton office or Alan Sydney (Partner) in our Winchester office.