Hello Readers,

You may or may not be aware of a significant change to EPC requirements for commercial buildings that came in on 1^st April 2023. This change reflects the minimum EPC requirement which is now an ‘E’ rating.

This requirement applies to new and existing commercial leases, with potential fines of up to £150,000 for landlords who do not comply. This is a significant movement towards NetZero, however unlike changes to residential properties this change is not as common knowledge.

With many landlords not being aware of this change, there could be some very significant bills needing to be paid. There’s a minimum fine £5,000 for non-compliant properties let for less than three months and those let for over three months could reach 20% of the rateable value of the property with a minimum fine of £10,000 to a maximum of £150,000.

I personally agree with improving energy efficiency and aiming for NetZero by 2050, but don’t doubt that the costs associated with making improvements will simply be passed onto businesses who are already suffering from increased costs at all angles. Is this the time to make these changes..? That’s the question we need to be asking ourselves!

Further changes down the line

There is a potentially concerning move in the horizon however, because as part of the transformation of the UK energy system and delivery of NetZero, it’s the intention for all rented non-domestic buildings to have an EPC rating of B by 2030.

When we bear in mind that 2030 is only seven years off, I do wonder how the country’s old, draughty, and poorly insulated commercial premises will be able to meet this new standard without significant investment on behalf of property owners!

Green leases

With all these changes taking place, I have been reading about some potential changes to how commercial leases are written, with green lease terms potentially brought in to manage energy efficiency.

For example, green lease clauses could impact several different areas such as provisions relating to:

• Service charges – which permit landlords to include the costs of energy performance improvements in service charge costs
  
  
• Alterations – clauses which restrict the tenant from carrying out alterations that may have a negative impact on the EPC rating or performance of the building
  
  
• Reinstatements – preventing the tenant from reinstating alterations where there would be an adverse effect on the building’s environmental performance
  
  
• Environmental systems – requiring the tenant to operate these correctly throughout the term

Are there any exceptions?

The answer here is yes, but this is limited and includes just where the building is:

• listed or officially protected and the minimum energy performance requirements would unacceptably alter it
• a temporary building only going to be used for 2 years or less
• used as a place of worship or for other religious activities
• an industrial site, workshop or non-residential agricultural building that doesn’t use much energy
• a detached building with a total floor space under 50 square metres
• due to be demolished by the seller or landlord and they have all the relevant planning and conservation consents
• owned rather than rented
• leased for 99 or more years or less than six months

There are some additional exemptions relating to vacant buildings and demolition if all of the following are true:

• it’s due to be sold or rented out with vacant possession
• it’s suitable for demolition and the site could be redeveloped
• the buyer or tenant has applied for planning permission to demolish it

What actions to take?

Where landlords have not yet made the necessary improvements, they will want to do so promptly in order to avoid any fines over the next few months.

I think that it would probably be worth assessing the cost of upgrading to an EPC B rating and considering making those improvements before the cost of materials start to soar. This way landlords would be future proofing their investment.

This change is particularly important to consider because, given the changes with residential properties that have adversely affected profits and the ability to invest through a SIPP, many investors have chosen to include commercial property in their strategy.

It will certainly be interesting to see the impact that this will have on commercial premises over the coming months and years!

Hasan