How ready is the commercial property sector for the EPC changes?

With changes to EPC requirements on the horizon, our Building Consultancy team sat down to discuss what impact they’ll have, and how well prepared commercial landlords are.

Overview of EPC Changes

In April 2023, a new Minimum Energy Efficiency Standards came into force, with all commercially let properties requiring a minimum energy performance certificate (EPC) rating of E. Further enhanced requirements are incoming, with the minimum EPC rating set to be raised to C in 2028 and B in 2030. Commercial landlords will be unable to let property that falls below those standards, and could face fines and sanctions for any breaches of compliance.

To kickstart our discussion, the team looked at two statistics from a Handelsbanken Property Investor Report:

• 95% of commercial landlords will need to make improvements to their property to meet the regulations
• Approximately 67% of landlords believe their portfolio is already sustainable enough.

This disconnect suggests that many landlords are either unaware of the true requirements or overestimating their compliance.

Challenges Faced by Landlords

This lack of awareness could be a ticking timebomb for the sector, as landlords who fail to meet compliance standards could face fines of up to £150,000.

Many private landlords we’ve spoken to are unaware of the legislation and say they don’t have enough knowledge. Others have said the required measures are too difficult to implement, and this is creating a divide within the sector.

With loopholes rapidly closing in line with new regulations, landlords are forced to act. But this has forced smaller landlords into difficult choices, with some having to sell up as they don’t have the resources to do so. However, larger funds and property owners can generally absorb the costs of the required improvements, and mitigate the impact.

Actions Landlords Can Take

With the challenges EPC standards bring to smaller landlords, a change in mentality can help to mitigate the impact when leasing properties.

For example, landlords are removing services from Licenses to Alter (generally required for the tenant to make any changes) which may damage the EPC rating of the property.

And more consideration needs to be given to the reinstatement (make good) obligations. The tighter EPC standards can lead to situations where perfectly good items need to be removed as they don’t comply, particularly if they relate to power and gas. Tenants may feel it’s unfair that they’re liable for the costs of removing an item that’s in good working order. Solicitors are often needed to clarify what’s required under the lease agreement and ensure that all reinstatement obligations are met properly.

From a practical point of view, our surveyors have seen landlords actioning work. In some cases, this is generally less expensive than some landlords anticipate. For example, replacing light fittings with LEDs is an easy win and can improve the EPC rating substantially.

Also, we’ve seen landlords removing gas-fired central heating when boilers are coming to the end of their useful life, and installing electric heaters in their place. This improves the EPC rating, particularly when the electricity drawn from the grid is renewable.

In fact, the move toward solar, wind and nuclear power across the UK has led to many landlords seeing an improvement in their EPC rating without lifting a finger. The less fossil fuel used by the grid, the better EPC ratings will be across the board.

Potential Consequences and Uncertainties

As we’ve said, smaller landlords face a tough choice, and this is not made any easier by the lack of clarity around governance of EPC standards. We’re not aware of any fines being given for substandard properties, and none of us could actually identify who the governing body is. So while there are measures in place, we don’t know who is enforcing them, or how.

Because of this uncertainty, some landlords are choosing to wait and see what happens, rather than expending the money to get properties up to standard now.

We also know from speaking to our clients that there is discontent among landlords because the goalposts could move. Many are concerned that they will invest in upgrading their properties now, only for them to fall foul of new regulations within a few years, and have to spend more money.

Final Thoughts

Given the limited information on enforcement and specific EPC requirements, it's difficult to give black-and-white guidance over what you should do. It is a matter of the haves and have-nots, as the larger portfolios will generally be able to make the improvements and swallow the costs. As for smaller landlords, it’s less clear, and will depend on individual circumstances.

All points in this article are opinions only and do not constitute official advice. However, if you are a commercial landlord and have any further questions on EPC standards, or you’d like tailored advice on your property’s EPC rating and what you can implement within your budget, our Building Consultancy team can help. Get in touch with one of our experts using the contact details below, and we’ll get back to you.