What do office occupiers need to know about EPCs and MEES regulations?

According to the latest Irwin Mitchell survey only 32% of respondents know the energy performance certificate rating of their main office building and only 31% know what EPC rating their office needs to be from 1 April 2023, despite the new rules coming in less than a month’s time.

So we thought we had better clarify what do occupiers of property need to know about EPCs and minimum energy efficiency standards.

What Is an EPC?

An EPC is produced by an energy assessor who assigns an energy rating of A (most efficient) to G (least efficient) to a property. It is valid for 10 years and is placed on a public register.

How Do EPC Regulations and MEES Regulations Interact?

The requirement to provide an EPC to a tenant when letting a property is contained in different legislation from the requirement to only let properties of an E rating or above:

• The Energy Performance of Buildings (England and Wales) Regulations 2012 contain the requirement for a landlord to provide occupiers with a valid EPC on a new letting.
• The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 make it an offence punishable via a fine of up to £150,000 for a landlord to grant a new lease for a property with an F or G energy rating. From 1 April 2023, this enforcement action will extend to all existing leases with a term of more than 6 months and less than 99 years, so will be be unlawful for a landlord to continue to let a property with an F or G rating.

What Do Occupiers Need To Know?

Occupiers should consider the following:

• Check the energy rating on the EPC for their property to ensure that it is compliant with the MEES Regulations. Some properties will be exempt from the requirement for an EPC and there are some exemptions in the MEES Regulations.
• When negotiating a new lease some landlords may look to pass on to an occupier the cost of environmental improvement works aimed at increasing the energy rating of the property. We typically see these costs inserted into the service charge, common items or costs clauses of a lease.
• Check whether the landlord has reserved a right to enter the property to carry out environmental improvement works. If so, ask whether any such works are contemplated. If there’s no reserved right, the landlord may be able to claim a “lack of consent” exemption on the basis they cannot carry out any environmental improvements during the lease term and so the MEES Regulations would not apply.
• It is worthwhile checking the recommendation report annexed to the EPC for details of works recommended to raise the energy rating.  Is it changing a few light bulbs or changing glazing throughout? Consider how disruptive these works may be to the occupation if carried out by the landlord. It may be possible to negotiate with the landlord for the occupier to undertake all or part of these works yourself in exchange for a rent-free or reduced rent period. Such works may reduce the occupier's energy costs.
• Pay proper attention to the EPC rating for the property at the start of the lease. A low EPC rating may mean higher energy costs for you. A very low rating may mean complex improvement works which could take longer for the landlord to implement.
• Look out for environmental performance co-operation clauses in leases which are fast becoming the norm. Often landlords and tenants are aligned in their desire to reduce their carbon footprints and can agree mutually beneficial ways to collaborate that serve both parties well in meeting this aim.
• Many business occupiers have values that are aligned to their environmental, social and corporate governance commitments. Occupying non-compliant property can cause reputational damage in the market and with stakeholders and prevent occupiers from meeting their ESG commitments.

Key Considerations Around Recovery of Energy Improvement Costs

There is, unfortunately, wide scope for dispute in relation to these regulatory changes. Asfar as the landlord and tenant relationship is concerned, it seems the main areas of potential contention will centre around service charges and end-of-lease dilapidations claims, particularly around mechanical and electrical services and plant.

There are a few general rules of thumb to keep in mind:

• There’s no obligation on either the landlord or the tenant to undertake any energy improvement works, the regulations merely impose fines if the premises are substandard.  This is important because unless the lease imposes a positive obligation on either party to undertake the works (and a right to recover the cost of those works) then, in very broad terms, liability for pure improvement works is unlikely to fall to the tenant.
• Simply because an item is below the required energy standard does not necessarily mean it is in disrepair. So, for instance, in a dilapidations claim, if a landlord claims for the cost of energy improvement works where the item is not in disrepair, that claim will probably fail.
• Subject to the specific lease terms, generally tenants will be liable to undertake or pay for works which improve the premises. Again, in a dilapidations context, even if the item in question is found to be in disrepair, if the claimed remedial works go far beyond works of ‘repair’ then the landlord may again fail, not least because its improvement works may supersede what the tenant was liable to do under its repairing obligation.
• That said, it doesn’t always follow that replacing an item such as obsolete mechanical or electrical plant with a modern more energy efficient equivalent, will fall outside of the tenant’s covenant to repair or the service charge obligations.  Ultimately it may be a question as to whether the new item is recognisably different to the item in disrepair. 

The best way to try and avoid these kinds of disputes will be to ensure the lease terms are favourable and clear, and to take early advice, ideally before the matter becomes contentious.

This article appeared in Costar on 6 March