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In 2015, the Minimum Energy Efficiency Standards (MEEs) came into play, meaning that from April 1st 2018, it will be illegal for landlords to grant new commercial leases in the UK on buildings with an Energy Performance Certificate (EPC) rating of an F or G. In addition, from April 1st 2023, the same restriction will apply to all lettings.
The accuracy of early EPC ratings has been questioned in the past, and as they are now playing a key role in the new legislation, its likely they will be scrutinised more heavily. An EPC rating lasts for 10 years, however landlords, tenants or incoming purchasers can commission a new EPC if there are doubts regarding accuracy – high levels of assumptions of lead to low scores. This has created new independent companies, filling this niche and providing high quality EPC certificates.
Improving a commercial building’s energy efficiency may seem like a landlord’s problem, especially as the MEEs minimum threshold is expected to increase with time in addition to already having a direct impact on building value. Nevertheless, there a few key areas tenants need to be aware.
If the existing lease extends past April 2023 and falls in the EPC F or G category, the landlord will have to come to an agreement with the existing tenant in order to complete the works. In terms of the landlord’s rights, it’s unlikely the lease will have provisions for access/works with the MEEs in mind – this could be an opportunity for tenants to negotiate improvement work and benefit from lower energy costs. Similarly, where a tenant has improved energy efficiency with alterations made during the term MEEs the landlord might have to retain the work, removing/reducing the tenant’s reinstatement costs.
An EPC rating will also directly impact a tenant’s ability to sublet or assign their lease, if the building falls into the G or F category and the lease surpassed the April 2018 deadline. If the tenant wishes to sublet after that date, the MEEs restriction will impact the tenant first. If this is the case, the landlord and tenant may have to collaborate and improve the energy efficiency together, or rely on MEEs exemption and pay admin costs associated with that.
If a landlord has not had the capital to bring the building up to minimum MEEs, a tenant may look at providing some capital or completing some work themselves, in turn for concession on the rent, or other incentives provided during lease.
Landlords can sometimes pass on costs to a tenant and strengthen their own position within a lease; if an EPC has not been completed for a building, it should always be made clear in the Heads of Terms whose responsibility this cost is.
This news was brought to you by Morgan Pryce, a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.