The impact of energy efficiency regulations on the rural commercial property sector

Many landowners have diversified into providing commercial premises by converting historic farms buildings. Given the age of some of these buildings, they risk breaching MEES regulations come 2023. Lucy Beachell, from Harrison Drury’s rural sector team, outlines the current regulations and how to reduce risking fines in the future.

Which regulations apply to commercial property?

The same energy efficiency regulations apply to commercial property as apply to residential property, this being by the rather lengthy Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962). However, it is Part 3 of the regulations which specifically applies to non-domestic private rented property. In other words, to commercial property which may also include farming and agricultural properties.

What do I have to do to comply with Part 3?

Part 3 prohibits landlords from granting a new tenancy of ‘sub-standard’ commercial property after 1 April, 2018, or continuing to let commercial property on or after 1 April, 2023. Sub-standard means an EPC rating of F or G. An E rating or higher means the property is compliant.

If you have a property with an EPC rating of F or G you must take steps to establish whether you can rely on one of the exemptions in Chapter 4 of Part 3 of the regulations or take steps to ensure all ‘relevant energy efficiency improvements’ have been made to the property and the details of the same have been registered with the PRS Exemption Register.

What are the exemptions under Chapter 4?

The exemptions available can be broken down briefly as follows:

Consent Exemption – This can be leaned on where the landlord requires consent from an occupying tenant to carry out works or requires consent from a third party to carry out energy improvement works, such as a superior landlord and consent cannot be obtained.

This is likely to become more relevant come April 2023 when there is a prohibition on continued letting. That being said, it is difficult to see why a tenant would not allow entry for a landlord to carry out works of this nature as, in theory, it would reduce their energy consumption.

Devaluation Exemption – To claim this exemption, the landlord must obtain a report from an independent surveyor which states that making the relevant energy efficiency improvement would result in a reduction of more than 5% in the market value of the property, or of the building of which it forms part.

Temporary Exemptions – In certain circumstances, a landlord is given six months to comply with the prohibition on letting sub-standard property in regulations 23 and 27. Until that six months has expired, the landlord will not be in breach of the prohibition on letting sub-standard property, even if the landlord has not carried out the relevant energy efficiency improvements.

These are called temporary exemptions in the MEES Regulations. Clearly, this exemption is only temporary and is therefore of very limited use to landlords.

Payback Test – you are only required to make improvements which have an expected payback period of seven years or less. Sadly, most improvements will pass this test and the evidential requirements to prove the test cannot be met are onerous.

Do the regulations apply to renewal leases?

This is a particularly troublesome area of the regulations and one which has not yet been clarified by the regulatory bodies. On a strict interpretation of the regulations, they prohibit ‘letting the property as a result of an extension or renewal of an existing tenancy’.

This would encompass all renewal leases and trigger the requirement for an EPC to be commissioned on a lease renewal. However, the non-dwelling guidance states: “Not all transactions will be considered to be a sale or let. These will include … lease renewals or extensions”.

Currently, the lack of clarity surrounding lease renewals is very unhelpful. But what is clear, is that landlords should, if they want to be sure they are compliant, obtain an EPC on a lease renewal as if it were the grant of a new tenancy and then consider their next steps from there depending on the rating.

Care should be taken at this point by a landlord to ensure they do not inadvertently put themselves in a position where they are in breach of MEES Regulations. It is highly recommended that expert advice is sought at the relevant time.

What if you do not comply?

The following list provides a stark breakdown of the potential financial fines imposed should you fail to comply with the regulations:

Maximum penalty for commercial property

If the length of breach is less than three months, whichever is greater of either of the following:

• £5,000
• 10% of rateable value of the property at the date of service of the penalty notice, up to a max of £50,000

If the length of breach is three months or more, whichever is greater of either of the following:

• £10,000
• 20% of rateable value of the property at the date of service of the penalty notice, up to a max of £150,000.

These figures indicate that the fines can be significant, so it is best to take a proactive approach to managing commercial property portfolios.

How does this affect the rural sector?

There are many landowners who have diversified into providing office space or other commercial premises by converting historic buildings, such as courtyards, barns and stables. Given the age of some of these buildings, it is unlikely they are properly insulated and are therefore at risk of being in breach of regulations come 2023, if let already.

We strongly suggest that all landlords review their commercial property portfolios ratings so that costs for improvements can be budgeted over the next two to three years, if necessary, under the regulations, rather than at the last minute in 2023.

Many historic buildings are also listed. The question of whether the regulations apply to such rural buildings will be covered in a separate blog post.

To review your commercial property portfolio ratings, or to discuss any change of use or future plans you may have for your rural property, contact Harrison Drury’s rural sector team on 01772 258321.