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Energy efficiency – reassessment by T?

The Energy Efficiency (MEES) Regs mean it is no longer possible to grant new leases to properties with an EPC of F or G. Moreover, existing lettings of F and G properties will become unlawful from April 2023.

But, an article in the Gazette makes the important point that most EPCs are inaccurate. The point is that EPCs on commercial premises were first introduced in 2008, but since then the rules have become stricter, and changes in Building Regs mean it is far harder to achieve the minimum standard. Accordingly, a large proportion of non-domestic EPCs are no longer accurate. For instance, if a property was E-rated in 2010, a 2018 reassessment might drop it down to F or G. If that is the case then there is potential for Ts to exploit this:

  • Rent review: if a property is reassessed at F or G then T may be able to argue that there should be no increase on an upwards-only rent review only because the premises have no ascertainable rental value (due to the Regs). Obviously, a rent review will not trigger the need for an EPC, but there is nothing to stop T seeking its own reassessment. If that happens, then L may be in breach of the Regs in 2023 (when existing F and G lettings become unlawful). One possible way for L to get around this would be to put an assumption into the rent review clause that the premises are to be regarded as (eg) no less than E. Needless to say, T advisors should be on the watch-out for such proposals, and resist them strongly.
  • Dilapidations: if T downgrades an EPC to an F or G, then that will raise an interesting argument on the dilapidations claim, since L will have to carry out upgrading works to re-let that downgraded property. T could argue that such works will replace works that T would otherwise be liable for. Furthermore, T may argue that any alleged diminution in value relating to the dilapidations disrepair (under s18(1) LTA 1927) is nullified by L’s breach of the Regs.

What can L do to overcome these potential risks? The obvious answer is to include a covenant that T will not obtain or commission an EPC (unless required to do so by the Regs). If T acts in breach of that covenant then it is arguable that T will be liable in damages for any loss resulting. Certainly, some leases are now being drafted on this basis, but it would be an unwise T who accepted such a provision.

See excellent article in [2018] LSG 9 July.

 

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