New law: Commercial property with energy rating below E to be unlettable

Investors and developers also need to consider the impact of the new rules on their businesses, and what they need to do to mitigate any damage the rules may cause.

Options for landlords are either to make ‘relevant energy efficiency improvements’ to their commercial properties - which will need to be funded - or to register exemptions for them on the PRS Exemption Register. If they do neither, and continue to let a property with only an F or G rating, they commit a criminal offence.

Exempt properties include industrial sites, workshops with low energy demands, and temporary and religious building.

There is also an exemption from making improvements if the landlord registers that it has a legitimate reason for failing to improve the property’s energy rating to E or above. Legitimate reasons include the following:

• it is not possible to make relevant energy efficiency improvements;
• all relevant efficiency improvements have been made but the property still does not merit an E rating;
• the landlord has not been able, within the last five years, to increase the energy rating because the improvement would reduce the market value of the let property by more than 5%, and the landlord has registered the necessary information on the PRS Exemptions Register in advance of applying for the exemption (the ‘devaluation exemption’);
• the landlord has not been able to increase the energy rating within the last five years because of a prescribed situation, and the landlord has registered the necessary information on the PRS Exemptions Register in advance of applying for the exemption (the ‘consent exemption’).

A prescribed situation for the purposes of the consent exemption is where either a tenant has refused to consent to the relevant energy efficiency improvement or third party consent is required and, despite reasonable efforts by the landlord to obtain it, that consent has either been refused or been granted but subject to a condition which the landlord cannot reasonably comply with.

Landlords should therefore be opening communications with tenants and third parties whose consent is required, to determine whether it will be given or not and, if not, whether an exemption applies.

Landlords should also be considering how to fund any improvements they plan to make, whether through additional service charges, increasing rent or through contributions from the landlords themselves.

Operative date

• 1 April 2023

Recommendation

• Commercial landlords with properties with an energy rating below E should be identifying which improvements need to be made, and how those can be funded – for example, through increased service charges or rents, or whether landlord contributions are required – in good time before the new rules come into force.