EPC or not to EPC…that is the question

Caitlyn Bennett, RDP Real Estate Solicitor, delves into one of the most urgent issues currently facing commercial property transactions.

It is not surprising that amidst the government’s proposed rigorous reforms with energy performance and building sustainability, that Energy Performance Certificates (EPC) have become a hot topic for negotiation and debate within commercial property transactions. For those who have managed to avoid the dreaded EPC debate, an EPC is a certificate provided by a qualified assessor which illustrates the energy efficiency of a building. It will contain information such as the type of property, the energy rating, recommendations to increase the rating together with the date of expiry.

The existence of Energy Performance of Buildings (England and Wales) Regulations 2012 (EPC Regulations) and the introduction of Part 3 of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations) has arguably created some confusion and controversy surrounding requirements of landlord’s and non-domestic properties. The requirement that a landlord of a non-domestic property must ensure their property reaches the minimum standard set by the MEES Regulations, before they are let or re-let from 1st April 2018 or continuing to let from 1st April 2023 seems to have sparked initial discussions of sustainability between clients, agents and legal professionals.

The ‘sub-standard’ rating is currently set at a rating of ‘E’ to enable a landlord to let a non-domestic property in England and Wales, however this is predicted to change under Labour’s new government reforms. This is also on the assumption the property does not benefit from an exemption under the EPC Regulations. The ‘sub-standard’ set by the MEES Regulations does not capture the sale of a non-domestic property, the obligation is merely to produce a valid EPC to a prospective purchaser. However, if the property in question is let or your client is intending to let the property in the future, it is crucial that the implications of the MEES Regulations are considered early on in course of negotiations of a transaction. Ignorance of the impact of the MEES Regulations on a property transaction can have costly consequences for your client, including but not limited to:
• the additional financial burden of bringing the property above sub-standard;
• the ability for the landlord/buyer to pass those costs on to a tenant;
• determining whose responsibility it is, to carry out any works required;
• severe financial penalties should you/your client to be in breach.

Attention needs to be drawn to the proposed future use of the property and whether any development works that have been undertaken or will be carried out (for example the installation of mezzanine flooring in an industrial warehouse to create a new lettable area), may trigger the obligation for a new EPC to be carried out.

A key transaction that has given rise to deliberation amongst commercial property individuals is lease renewals and the conflicts between the EPC Regulations and the guidance imposed by the MEES Regulations. This being an instance where a tenant who is already in occupation of a non-domestic property and is renewing their lease whether pursuant to the security of tenure or otherwise. The EPC Regulations require any landlord to provide a valid EPC on the grant of a lease and it is largely accepted that the reasoning behind this is to allow a prospective tenant to assess and consider the energy performance of that particular property. Arguably an existing tenant is not necessarily a prospective one and will already have gained knowledge of the building’s energy performance through previous occupation. The MEES Regulations state that if the landlord will be re-letting the property to a new or existing tenant, they are required to obtain a new EPC, if there was a valid EPC in existence under the previous lease and such EPC does not meet the minimum requirements. The uncertainty here reminds us that any EPC liability must be ironed out early on in negotiations and the safest approach is to provide an EPC on any letting of non-domestic properties to avoid any financial penalties.

For more information or to speak to Caitlyn directly, email caitlyn.bennett@rdplaw.co.uk or call 01633 413500.