Energy Performance Certificates (EPCs) have long been seen as an unnecessary annoyance but now the introduction of the Minimum Energy Performance Standard (MEPS) mean EPCs have the potential to cause real upset in the market.
The Basics
From 1 April 2018, it will be illegal to grant or assign a lease of or sublet a property which does not have a MEPS rating of “A – E”. All rental properties will require an EPC. Whilst there are a number of exceptions, the general rule of thumb will be that the new regulations will affect all commercial property unless it is a listed or agricultural building.
The Impact
Surveys carried out in the years following 2011 suggest that around 18% of commercial property stock in the UK has an EPC rating of “F” or “G”, so this is no drop in the ocean.
The market is also likely to be affected in advance of the implementation of the new regulations as value of the property will be affected by the mandatory work that needs to be carried out and the possible gap in rental income a Landlord may suffer which the property is not lettable.
Banks have been imposing requirements for a couple of years on borrowers, obliging borrowers to spend the necessary money under threat of having the investment loan reduced in 2018.
Landlords may be inclined to think that the new regulations are future problem, if they already have sitting tenants. However, not having attained a sufficiently high EPC rating could mean that their tenants will be left holding all the cards. Tenants would be able to argue that the open market rent of the property is “nothing” as the Landlord would not be able to let the property at all until the works were carried out to make the property sufficiently energy efficient. This could cause havoc in rent review or lease renewal negotiations.
Next Steps
Landlords should review the EPCs on all of their properties and take steps now to improve their EPC rating to the required standard as soon as possible so it can plan any expenditure in conjunction with key dates across its portfolio.
