Since Phase 1 of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 came into force back in 2018, landlords and their solicitors have become accustomed to the practice of providing an EPC to a tenant on the grant of a lease, and to casting an eye over that EPC to ensure that the property is not ‘sub-standard‘. But with Phase 2 coming into force in 2023, now is a great time for you to ask (again): is my science park MEES-ready?
From 1 April 2023, a landlord must not continue to let a non-domestic property (even if there is no change in the tenant) if it is sub-standard. The only exceptions are where the landlord makes sufficient energy efficiency improvements to the property to bring it up to standard, or where it validly registers an exemption claiming a legitimate reason not to do so. This will mark a sea-change in how science parks must be managed going forward. It will no longer be sufficient to consider EPCs only when an impending transaction so dictates; asset ratings will need to be actively managed on an ongoing basis.
It is important to consider two further factors:
- advancements in energy performance assessments mean that a fall of one or two (sometimes even three) bands on reassessment is now routine; and
- it is likely that the current minimum band of E will be raised in the not-too-distant future, with the Government having now committed to raising the minimum band for rented non-domestic buildings to B by 2030 (barring lawful exceptions).
In other words, an asset rating of D or E given eight or nine years ago will provide little to no comfort that the property is above today’s – and especially tomorrow’s – definition of ‘sub-standard‘
So what should science park owners and managers be doing?
- Consider an EPC audit. Create a spreadsheet of the asset ratings of every let or lettable property on your science park, together with the date of the EPC. Use this to identify properties that currently do not have an EPC, and which properties are most at risk once Phase 2 is in force. New build properties on science parks are usually constructed to the highest standards and often achieve A or B ratings, but pay close attention to your more dated buildings and to buildings whose EPCs are several years old.
- Identify when an EPC is not required. If your EPC audit identifies any properties that do not currently have an EPC, do not rush out to obtain one. The absence of a valid EPC for a potentially sub-standard property that is let (and will continue to be so after 1 April 2023) might assist you in postponing the need to carry out improvements. You will need to work with your advisors to establish whether and how this applies to any of your buildings. Also, consider whether the building is a ‘building‘ for the purposes of the EPC Regulations, or whether it otherwise falls outside the EPC requirements (eg because it satisfies the demolishment test).
- Consider indicative EPCs. Ask yourself whether it would be worth employing an EPC assessor to produce an indicative (non-published) EPC for those properties most at risk, especially those that have not undergone assessment during the last five or so years, and the older buildings at your science park. Bear in mind that the MEES Regulations will only bite where there is a valid EPC in place so, if there is no valid EPC, the building will not be caught by the Regulations until the requirement for an EPC is again triggered. Accordingly, you should be careful about voluntarily commissioning a full EPC for such properties where there is no trigger; indicative EPCs could help with your planning in the meantime.
- Identify possible improvement works and exemptions. Working with your EPC assessor and surveyors, consider whether any recommended improvement works are worth carrying out. The cost and benefit of such improvement works should be considered on a case-by-case basis, paying close attention to whether the ‘seven year payback‘ test is satisfied in each instance. Then work with your advisors to identify any available exemptions, and to register those exemptions on the PRS Exemptions Register. Keep exemptions under review; they are time-limited, so you will need to create and implement a strategy for their ongoing evaluation and the circumstances on which they are based.
- Conduct a lease audit. Review the leases currently in place in respect of all let properties and identify pertinent provisions for future reference. Rights of access for EPC assessors should be noted, as should any relevant landlord and tenant covenants. Also make a note of term end dates and break dates, so these can be taken into account when planning MEES improvement works. Consider (if you have not already done so) any updates that may be required to your standard form lease and possibly your licence for alterations. Are tenants prohibited from obtaining EPCs except in certain specified circumstances and is the landlord entitled to control the identity of the energy assessor producing an EPC? Are tenants prohibited from carrying out alterations that may detrimentally affect the property’s asset rating? Who is responsible for maintaining the property’s asset rating – you or your tenant?
- Implement an ongoing management strategy. Consider appointing someone within your team (which could be someone at your or your surveyors’ organisation) to manage your EPCs and asset ratings actively going forward. They could use your audit as a base, to be updated when improvement works are undertaken, new EPCs are obtained and/or exemptions are registered. It should also involve active management of key dates in the future, especially around the expiry of existing EPCs and the expiry of the time limits applying to any registered exemptions.
Author: Giorgia Clements, Senior Associate, Penningtons Manches Cooper LLP