Global menu

Our global pages

Close

Eversheds Sutherland property column: Minimum energy efficiency standards - planning for the future

  • United Kingdom
  • Corporate Real estate
  • Real estate
  • Real estate planning
  • Energy and infrastructure

16-07-2021

While COVID-19 has been raging, the climate change emergency has not gone away. As part of the strategy to achieve the ambitious carbon reduction targets set by the UK government, it is intended that the minimum Energy Performance Certificate (EPC) rating for the lawful letting of commercial premises under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations), will be raised to B from its present level E by 2030. The government's consultation paper published in March on the "Implementation of the EPC B Future Target" set out the government's suggested plans on how to reach that new B target in time.

The proposals include:

  • A requirement that all let commercial property should have a valid EPC in place at all times by 2025 (thereby bringing many more commercial properties into the ambit of the MEES Regulations)
  • An interim minimum energy efficiency standard of an EPC rating of C by 2027.
  • A combined exemptions and compliance database to facilitate enforcement.
  • Restrictions on both letting agents and online property platforms to require them only to advertise and let properties that are compliant with the MEES Regulations.

The consultation paper also raises the possibility of new primary legislation giving tenants of commercial properties some duties regarding compliance with the MEES Regulations (it seems most likely in the context of a tenant's fit-out), and to add consequent duties of co-operation for both landlord and tenant to work together to reach compliance.

Carbon reduction targets are of course not just an aim of central government. We have been heartened by the number of our corporate occupier clients who have announced their own ambitious carbon reduction targets, many with a net zero carbon aim for 2030. As the buildings that it owns and occupies make up so much of any organisation's carbon footprint, the ESG commitments and the proposals for a significant raising of energy efficiency standards have combined to trigger many discussions on how best these aspirations and statutory compliance requirements can be worked into the landlord and tenant relationship.

To date, many leases of commercial property in England and Wales have addressed the obligations imposed on a landlord under the MEES Regulations by the inclusion of typical "stand still" drafting, such as that found in the model commercial lease. These widely incorporated provisions reserve a right for the landlord to enter the demised premises to carry out energy efficiency improvements but only if the tenant, in its absolute discretion, agrees to the landlord so doing. In turn, if the tenant does consent to the landlord's entry and the carrying out of those works, the tenant is obliged to pay the cost of those works; after all, it will be the tenant who enjoys the benefit of the lowered energy costs. If the tenant decides not to allow the landlord entry and the property is left substandard for the MEES Regulations, the landlord can use the tenant's lack of consent to the carrying out of the works as the basis for the claiming of an exemption under the MEES Regulations and so it will be lawful for the landlord to continue to let the substandard property.

This "stand still" drafting does limit the landlord's spend during the life of a lease, and is lawful within the MEES Regulations, but it does work against the aim of improving the energy efficiency of buildings. The landlord has to be seen to claim an exemption under the MEES Regulations and the tenant has to refuse to allow energy efficiency improvements to be carried out to avoid paying for what the landlord would have to pay for at the end of a lease if it wished to re-let the premises. We have always had landlord clients who so value their green credentials that they never wished to be in a position of claiming an exemption under the MEES Regulations. However, we are now seeing clients who occupy extensive leasehold property no longer wanting to be in a position of being seen as the stumbling block to the landlord's compliance, the underlying reason for the landlord claiming an exemption. The government's proposal of a combined EPC and exemptions register will no doubt bring that concern to the fore.

For those corporate occupiers who have their own ambitious carbon reduction targets, ensuring the retro-fitting of existing commercial property stock to bring it up to an EPC rating of C by 2027 and an EPC rating of B by 2030 will be a substantial undertaking, both in terms of engagement with the various landlords and the costs which a tenant might be obliged to contribute. It may well be that many of the energy efficiency improvement works that are required are not in the nature of repair, but are alterations of a sort that requires the landlord's consent under each lease. It may be that the only way to ensure that this particular building the tenant occupies is net zero carbon is to replace the communal gas boiler, which is not part of the tenant's demise but is the landlord's responsibility. Then it might be that the costs of replacement of that "working-perfectly-well" gas boiler are or are not a recoverable item under the service charge, as many lease service charge schedules exclude the costs of upgrade or renewal where beyond repair. And of course, if an occupier in turn is a landlord by way of sub-letting there are further complications.

So as both landlords and tenants work towards carbon reduction targets and towards compliance with the proposed obligations under the reform of the MEES Regulations, the overriding theme must be that of co-operation and engagement, whether or not imposed by new primary legislation. 

For more information, contact: