Know the energy efficiency rules for commercial lets on farms
© Tim Scrivener Farmers who have diversified by letting out commercial property such as office space and retail units must ensure they are compliant with increased energy efficiency requirements.
These are expected to be ratcheted up in 2027 and again in 2030, so rural landlords may want to take a long-term approach to any planned investment in raising energy standards.
What is changing?
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 set out the minimum level of energy efficiency in non-domestic properties in England and Wales.
Since 2018, it has been unlawful to grant a new tenancy, including renewing an agreement, unless the property has an energy performance certificate (EPC) rating of E or above.
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However, from 1 April this year, landlords can only continue to let a commercial property if that property meets the minimum E rating.
If the property currently has an F or G rating, the landlord will either be required to install energy-efficiency measures to raise it to an E, or they may, in certain circumstances, apply for an exemption from the rules.
The government has also proposed that from 1 April 2027 it will be unlawful to let any non-domestic property if it has an EPC lower than a C, rising to B by 1 April 2030.
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What sort of property is covered by the rules?
Letting buildings for non-farming use is the most popular form of farm diversification, according to Farm Business Survey data.
However, some buildings typically let by farmers may fall outside of the energy standards legislation.
The rules only apply to non-domestic property that is legally required to have an EPC, so buildings which are exempt from an EPC, such as industrial sites, workshops and non-residential agricultural buildings with low energy demand, fall outside the scope of the legislation.
A general rule of thumb is that if the building does not have any heating or cooling system, an EPC is not required (except in buildings where there would be an expectation of heating).
Property types that could fall under the scope of the regulations include farm buildings that have been converted into offices, retail space, studios, show rooms and gyms.
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The situation is slightly less clear-cut with farm-based holiday accommodation. Government guidance is that an EPC is only required if the guest is responsible for paying the energy bills, and most holiday-home owners will be picking these up.
However, it is possible to argue that the guest indirectly pays the energy costs as part of their rental fee.
The safest option is to contact Trading Standards, which is responsible for enforcing the legislation, to clarify if an EPC is needed or not.
What can be done to improve EPC ratings in commercial properties?
Landlords who have a building with an F or G rating will need to take action quickly, or investigate whether they qualify for an exemption.
Installing low-energy lighting, draught-excluder strips around doors and insulation can be easy wins in terms of raising a property’s rating.
Other possible solutions include replacing single-glazed windows with double-glazing and upgrading any electrical heating systems to a more efficient model.
More involved works, such as internal wall insulation or the retrospective introduction of below-floor insulation can result in a greater increase on the EPC scoring.
However, advice on the suitability of improvement measures should always be taken before entering a construction contract to make sure a holistic view is taken.
In addition, some rural landlords are looking at installing renewable energy electricity and heating systems, both to improve the EPC and to give tenants the opportunity to buy electricity at a cheaper rate than they are likely to currently be paying.
Is grant support available?
The Boiler Upgrade Scheme provides grants to cover part of the cost of replacing fossil fuel heating systems with a heat pump or biomass boiler.
It may also be worth investigating with the local council if it has any energy efficiency funding available to businesses.
Exemptions
Several exemptions allow landlords to continue letting a property that does not meet the minimum E rating. They include:
- Seven-year payback test: The ban on letting non-domestic property below an E rating does not apply if a landlord can show that the cost of purchasing and installing a recommended improvement or improvements does not meet a simple seven-year payback test
- Third-party consent: This could apply if improvements cannot be made because consent cannot be obtained from the current tenant of the property, or if other third parties, such as the local authority, refuse planning permission for improvements
- Devaluation: Applies where there is evidence that the installation of a relevant measures would devalue the property by more than 5%
- New landlord:Â New landlords can apply for an exemption for six months.
Any exemptions must be registered on the private rented sector exemptions register.
After five years, the exemption will expire and the landlord will be required to try to improve the property to meet the minimum standard, or register another valid exemption.
What happens if there is a breach of the rules?
A landlord letting a non-compliant building could be fined up to £150,000, and anyone found to have submitted false information to the private rented sector exemptions register risks a financial penalty of up to £5,000.
How often do EPCs need to be carried out?
All EPCs are valid for 10 years. The cost will vary according to the size of a property, but a report on a small unoccupied office in a converted farm building might be expected to cost around £200.
Other considerations
High energy prices mean tenants are far more conscious of energy consumption than they used to be, so raising standards should help to make the property more lettable.
If work needs to be carried out part-way through a tenancy, it is always advisable to engage with the tenant as early as possible, so plans can be put in place to minimise any disturbance.
Given any works should result in a reduction in running costs, most tenants should be supportive.
While it has not been officially confirmed by the government that an energy performance certificate (EPC) B rating will be required by 2030, the consensus within industry is that some tightening of the rules is highly likely.
With this in mind, it may be sensible to put in place 10-year maintenance plans for any commercial property on the farm, so any works can be programmed in to spread the cost.
Finally, all of the high street banks now have net-zero targets, so are becoming less keen to lend against properties that are not energy efficient.
Farmers looking to refinance and using property as security are likely to be offered better rates if they can prove a building is energy efficient.
Residential let property
There are similar, but different, obligations for residential landlords.
For residential property, it has been unlawful to let property with an energy performance certificate (EPC) rating poorer than an E since April 2020.
The government has proposed raising the minimum EPC rating to a C for new residential tenancies from 2025 and for existing residential tenancies from 2028.
The advice in this feature was provided by Strutt & Parker rural surveyor Florence Elmhirst, buildings surveyor Alexander Macfarlane, and Donna Rourke, head of environment, social and governance for Strutt & Parker/BNP Paribas Real Estate.