220: Energy efficiency challenges could leave many commercial premises unlettable

The vast majority of commercial premises will need extensive improvement works over the next decade in order to bring them up to EPC rating A+, A or B. Recent government policy on improving energy efficiency in non-domestic premises, suggests that by 2030 there could be a complete ban on letting buildings with an EPC rating of less than B.

It is estimated that less than 12% of EPCs lodged in the last 10 years were given rating B or higher. Research also suggests than 1 in 10 London offices could be unusable by 2023 unless improvement works are carried out.

Landlords are currently unable to grant new lettings of commercial property with an EPC rating of F or G, subject to certain exemptions. By April 2023, landlords will be prohibited from continuing with an existing letting if it has rating F or G.

Our recent blog covered the latest government consultation which sought views on the implementation of the target rating of B by April 2030. The results of the consultation are expected this autumn.

In the meantime, the debate continues between landlords and tenants about who will pay for improvements works to bring buildings up to the required standard. This will require fundamental changes to services including heating, air-conditioning, ventilation and lighting.

As the length of lease terms have shortened, it may be increasingly difficult for landlords to recover the cost of major works through the service charge. Savvy tenants will be scrutinising service charge wording to ensure that energy efficiency improvements works are not included within the service costs or require absolute consent to such works.

Depending on lease wording, tenants may be entitled to refuse to give consent to carry out works to improve the environmental performance. This in turn may allow a landlord to claim an exemption under current minimum energy efficiency standards regulations to continue to lawfully let a lower rated building.

Green lease provisions are now commonplace in commercial leases requiring parties to monitor energy consumption, ensure ambient conditions are maintained and set energy efficiency targets for both landlords and tenants. Whether this is enough to significantly improve energy consumption and EPC ratings is debatable.

Ultimately improvement works will be needed in the long term and should be put on the agenda now, as it looks like EPC rating B is set to be the goal for lettable buildings.