How Energy Efficient Is Your Rental Portfolio?

 

 

 

 

 

 

 

 

 

Dawn Reynolds 

 

If you have diversified your farm income by converting any of your outbuildings for commercial rent, are you aware that new minimum energy efficiency standards (MEES) announced last year came into force in April 2018? Minimum energy efficiency ratings have been a concern for landlords of older residential and commercial buildings, particularly on farms where many are made of traditional materials and are not easy to upgrade. The new standards, introduced for all rental properties, mean that buildings (with some exceptions) with an energy efficiency rating below E cannot be rented out or sold.

 

Meeting carbon reduction targets
 

This legislation is part of the government's commitment to meeting its carbon reduction targets. It has been recognised that buildings contribute significantly to greenhouse gas emissions and the government estimates that around 18% of commercial buildings fall below the required standards.

 

Those properties that do not require an EPC include most listed buildings, properties with low energy use (including workshops, industrial units, and non-residential farm outbuildings), or those which do not use energy to regulate their internal temperature.

 

In addition, there are exemptions if the buildings in question do not require an EPC; the tenant has failed to provide consent to the works being undertaken; the improvement works will devalue the property; or if the landlord has a temporary exemption by virtue of the recent grant of lease.

 

Sub-standard rating means no new or renewed tenancy
 

Any building rated F or G will be considered 'sub-standard' meaning that a landlord cannot grant a new tenancy or extend, or renew an existing one, and from 1 April 2023 no 'sub-standard' commercial building can be let at all. However, the regulations do give landlords some flexibility in how they improve the EPC rating of the property and may be able to recover the costs of the improvement by increasing the rent or service charge – although this will obviously depend on market forces.

 

It is very likely that many converted farm buildings may struggle to reach the minimum requirements. However, it is worth exploring whether or not there is scope for registering an exemption, particularly under the 'low energy demand' banner for industrial units and workshops. There is no definition in the legislation or commentary one what constitutes 'low energy demand' – this may become clearer as more exemptions are registered.

 

Exemptions do apply in some circumstances
 

Unfortunately, landlords will not be able to shift the burden of responsibility for the required improvements to tenants: failure to reach an E rating is not a breach of a repairing covenant. By the same token, if there are elements in the building for which the tenant would ordinarily be responsible but which the landlord intends to upgrade, such as repairs to the heating system, then the tenant cannot be subject to a dilapidations claim if they do not carry out the necessary repairs.

 

The financial penalties for non-compliance are based on the property's rateable value. However, at the moment, the regulations only affect re-lets or sales so, if landlords do not need to re-let or sell the property, they do have time to explore thoroughly whether or not any of the exemptions might apply before they are obliged to start the upgrading process.

 

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