Energy Performance Certificates / Economic, Social & Governance

EPC's in England and Wales

Energy Performance Certificates (EPC) are required whenever a building is constructed, rented or sold, to record how energy efficient a property is. The certificate provides a rating of the energy efficiency and carbon emissions of a building from A to G, where A is very efficient, and G is very inefficient. 

The Energy Act 2011 introduced the Minimum Energy Efficiency Standards (MEES) in March 2015,  which stipulates as of 1 April 2023 any property with an expired EPC or with a rating of F or G, will not comply with the legislation, even with an existing tenancy in place, unless exempt. Exemptions are either linked to financial providence, whereby any works would either be ‘high cost’ (residential) or the costs of works would not meet the seven year payback test (commercial), ‘devaluation’ exemption and the final more practical exemption ‘third party consent’. Third Party consent is likely to be a particular issue of Landlords, for example if they are not given access by the Tenant to carry out the works (yet most commercial leases should allow for this). All exemptions will need to be registered by the Landlord and will last five years.

Alongside the EPC is the Recommendation Report, which provides guidance on how the energy performance of the building can be improved (to reduce running costs) together with an indication of the payback period. These can be linked to lighting, heating, ventilation, air conditioning and fabric and insulation albeit will not provide specific instruction, nor any cost information.

There are financial penalties for breaches of the regulations.  These will be enforced by the Local Council’s Weights and Measures Authority.  Where the breach is for less than three months, the fine will be equivalent of 10% of the rateable value of a commercial property, subject to a minimum penalty of £5,000 and a maximum of £50,000 and £2,000 for residential properties.  Where the breach is for more than three months, the fine will be equivalent to 20% of the rateable value for commercial properties subject to a minimum penalty of £10,000 and a maximum of £150,000 and £4,000 for residential properties.

Following the Prime Minister’s announcement on 21 September 2023, the previously adopted White paper from December 2020, which dictated EPC’s would be required to have a rating of B by 2030, could be softened. It is yet to be publicised as to the extent of the revised legislation however we expect the timescales may be moved out by a couple of years to relieve pressure on Landlords to achieve these goals.

EPC's in Scotland

In Scotland although an EPC needs to be in place when a property is being sold or let, there is no prohibition on selling or letting a property below a specific EPC level. 

The Scottish Government has proposed to introduce regulations requiring all private rented sector (PRS) properties to reach a minimum standard equivalent to EPC rating C on a change of tenancy from 2025, with a backstop date of 2028 for all remaining PRS properties.  For all other owner occupiers, the proposals call for the C rating to be reached by 2033.

The Scottish government are however currently investigating a new regulatory framework for non-domestic buildings to ensure they are net zero by 2045.  It is intended that regulations will be introduced in 2025 and will include trigger points, backstop dates, compliance and enforcement approaches. 

In Scotland, in addition to the EPC, The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 dictates that where there is a sale or lease of non-domestic property with a floor area of over 1,000 sqm (10,764 sqft) a Section 63 Action Plan is required.  For such properties, owners are required to have their buildings assessed and to have an “action plan” prepared which includes the energy performance and emissions targets and the measures that will be taken to meet the targets.  The improvement measures will only be required where the energy savings over 7 years would exceed the initial cost.  If however, the building has been constructed in accordance with 2002 Building Regulations, then no Action Plan is required, as it is deemed to be compliant with energy performance requirements.

EPC ratings in England and Wales are not directly comparable to those in Scotland.  In order to understand the energy efficiency of a building it is important to examine real energy usage rather than just looking at the headline usage.  Buildings in Scotland, often perform less well than the equivalent building in England and Wales where the calculation includes comparison with theoretical building emissions.  Both north and south of the border however, EPC ratings for non domestic buildings are calculated in part, by finding the predicted carbon dioxide emissions per sqm and then banded between A and G rating. 

Valuation Context

We note the softening of Government Guidance in relation to EPC legislation as part of their election manifesto. Furthermore, Scottish new vision is heavily caveated, with Government documents suggesting the targets are subject to “where it is technically feasible and cost-effective to do so”, with no detail on what that cost is.

In reality we consider tenants and occupiers will drive energy efficiency requirements forward, particularly in the office sector, where there is a drive to get staff back into the office through welfare improvements and to ensure strong ESG credentials.    

While there may be some ‘easy fixes’ to improving a property’s energy efficiency in the short term, greater due diligence and advice will be required as to the medium and long-term impact any proposed works may have and the likelihood that improving an assets rating to a certain standard, may well be a prudent course of action.