EPC's, Lease re-gearing and lease renewals, what you need to know

We were asked the question about the regearing of a lease and the subsequent effect upon the EPC’s which were in place for a let residential property. We hope our answer might be useful to you too.

What is a lease agreement?

A lease agreement is an essential document for both the landlord and a tenant be it for commercial property or residential property. From the landlords’ perspective, it is an agreement where terms are laid and agreed for letting the premises out for rent and from the renters’ perspective it gives enough rights to do things they intend to without any limitations or hindrances.

So the terms laid out in the agreement must be mutually agreeable as once it is finalized there will be no scope for changes. But in the real-world due to certain economic circumstances, these terms may need to be revisited and that is when lease regearing comes into the picture.

What is lease re-gearing?

Re-gearing is a process that allows landlords and tenants to renegotiate and amend existing lease terms. The newly agreed terms can be documented by way of a reversionary lease and/or a deed of variation or side letter.

This regearing can be initiated by either the tenant or the landlord and at any time during the lease term but most people prefer to do it at the end of the term as it is more convenient.

Re-gearing can be beneficial for both tenants and landlords as these are more agreeable terms that help in achieving longer-term commitments.

Advantages of lease regearing.

There are many reasons why a regear of a lease may become necessary for a tenant and a landlord.

A lease regear maybe initiated by a tenant for many reasons like:

• The original lease terms may no longer be suitable as it may have many provisions which are no longer acceptable to the tenant.
• The tenant may bethinking of moving out. If it is a commercial property, it may be because the business has grown, or it has failed and hence thinking of selling a business. If it is a residential property, the tenant may be looking for a different home to live.
• The lease may have provisions that do not allow underletting. The tenant may want to sublet space to generate some income.
• Act as a way to stop an ever-increasing rent.
• The tenant may want to alter the premises for business or recreational purposes.
• May get rent-free period from a new lease which helps in capital gains.

Advantages for the landlord of lease re-gearing?

Many landlords are keen on lease regearing including the likes of big companies.

• If the tenant is a good and reliable one and flexible with the requirements of the tenant, it will help the landlord maintain a steady and long stream of income.
• The landlords’ cashflow issues can be resolved as leaving a space empty will put a dent on the income.
• It helps to increase the value of the asset as the value is dependent on how long the tenant has leased the property.
• If the tenant stays longer, the rental deposit can be repurposed for other financial activities.

Lease regearing is an opportunity for both tenants and landlords. A landlord may be keen to renegotiate even to a lower value of rent rather than remain empty incurring losses. Whereas a tenant will be looking to make the most of the failing market and look for long term commitment rather than search for a new property that may have its own set of pitfalls.

Do you need a replacement EPC when re-gearing a lease in a residential premises?

EPC Regulations

The Energy Performance of Buildings (England and Wales) Regulations 2012 sets out the obligation to provide an EPC when “selling” or “renting out” a property(Regulation 6). Rather unhelpfully, neither of these terms are defined in the EPC Regulations.

So we have guidance(not law) setting out that an EPC is not required for a lease renewal under EPC regulations. The answer to the question is that no you do not need a replacement EPC where lease re-gearing has taken place.

Do you need a replacement EPC when regearing a lease in a commercial premises?

MEES Regulations

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (“MEES Regulations”) went in the opposite direction to the EPC Regulations. 

The MEES Regulations prohibit the letting of sub-standard non-domestic private rented property as a result of an extension or renewal of an existing tenancy on or after 1 April 2018(Regulation 27). So how do we know if the property is sub-standard without having an EPC to confirm?

The Non-domestic MEES Guidance note suggests that in the absence of a valid EPC, a new EPC would be required on re-letting to a current tenant. 

In conclusion?

So the EPC Regulations, read in conjunction with the guidance note, sets out that an EPC is not required for a lease renewal. However the more recent MEES Regulations, read in conjunction with the guidance note, sets out that a valid EPC is required. The safest approach might be to stick with the most recent regulations and obtain an EPC. 

However if the landlord has made improvements to the leased property it may be to the landlords advantage to have a revised EPC, due to the material change to the property.

It may also serve the tenant also, since the tenant may have a far more comfortable home to live in and one which may be cheaper to heat depending upon the level of improvements made.

How can Summit Environmental help you?

• Are you a tenant wondering how the property you rent could be more energy efficient?
• Are you a landlord wondering about regearing and how the EPC might affect you?
• Is you EPC expiring?
• Do you know how to check if your EPC is still valid?
• Need a new EPC?
• A Retrofit Assessment? What is a retrofit assessment? is an in-depth assessment of a property, based on the following criteria; An Occupancy Assessment, An Energy Assessment and A Condition assessment of the property. Want to know more contact us

https://www.summitenvironmental.co.uk/contact