Commercial shop-and-upper property on a UK high street

Illustrative image only. This image does not depict a specific Realty Packaging property, adviser or completed project.

Main points

  • An EPC measures energy performance. MEES creates legal restrictions on letting certain privately rented non-domestic property.
  • For qualifying commercial property in England and Wales, EPC E remains the current minimum standard.
  • The proposed EPC B requirement for privately rented buildings over 1,000 square metres from 2031 is not current law as at September 2026.
  • Shop-and-upper properties may contain separate commercial and residential units with different EPC and regulatory requirements.
  • Lease wording does not automatically make a tenant responsible for energy improvement works.
  • Capital expenditure should be modelled with rent, finance, voids, tax, VAT, service charges and reserves.
  • EPC and MEES risks should be reviewed alongside the lease, planning, building condition and operational compliance.

EPC and MEES in plain English

An Energy Performance Certificate, or EPC, records the energy performance of a building on a scale from A to G. It is generally valid for 10 years and is produced by an accredited energy assessor.

The EPC is the measurement. The Minimum Energy Efficiency Standards, or MEES, are the legal consequences that may apply to a property.

For qualifying privately rented non-domestic property in England and Wales, EPC E is the current minimum standard. Since 1 April 2018, landlords have generally been unable to grant a new tenancy, or renew or extend an existing tenancy, where the property is rated F or G unless a valid exemption applies. Since 1 April 2023, landlords have generally been unable to continue letting an F or G property unless a valid exemption is registered.

An EPC alone does not prove that all MEES obligations have been met. Investors must check whether the property is within scope, whether an exemption applies, whether it is registered and whether the relevant tenancy is covered.

The current rules contain exclusions. These include certain short or very long leases and property that is not legally required to have an EPC. The specific title, use, tenancy and building configuration must be reviewed.

Current law and future policy

The government has consulted on stronger non-domestic MEES standards.

As at September 2026, the June 2026 interim response stated that:

  • The previously proposed 2027 EPC C milestone will not be pursued.
  • Buildings below 1,000 square metres are intended to remain subject to the current EPC E baseline.
  • Privately rented non-domestic buildings over 1,000 square metres are intended to reach EPC B from 2031 where cost-effective.
  • The higher EPC B requirement will only take effect after secondary legislation has been passed and detailed guidance is issued.

The proposed EPC B requirement is therefore government direction, not current law. Investors should not describe EPC B by 2030 as a legal requirement.

The position should not be ignored. Larger properties may face future expenditure, reduced demand or obsolescence risk. A sensible approach is to assess the likely works and funding requirement without pricing the asset solely on an unconfirmed target.

Why this matters to investors

A poor EPC rating can affect more than compliance.

It may restrict:

  • New lettings.
  • Lease renewals or extensions.
  • Marketing to future tenants.
  • Rent levels and tenant demand.
  • Valuation and resale.
  • Lender appetite.
  • Refinancing terms.
  • The timing of a refurbishment.

Energy works can also cause access problems, tenant disruption and temporary voids. A shop may need to close while lighting, heating, windows or insulation are replaced. Works to upper floors may require access through the commercial unit or shared areas.

The person paying the energy bill may not be the person funding the improvement. A landlord may pay for fabric or plant upgrades while a tenant receives the benefit through lower energy costs. Lease wording, service-charge provisions and tenant-consent requirements control the practical position.

A headline yield can therefore be misleading if future MEES expenditure is excluded.

The shop-and-upper problem

A mixed-use building may contain a commercial shop and one or more residential dwellings. These parts may require separate EPCs and may fall under different regulatory regimes.

Do not assume that commercial MEES rules apply identically to the residential upper units.

Check:

  • Whether the shop and upper units have separate EPCs.
  • Whether the parts are separately titled.
  • Whether they are separately leased.
  • Whether any unit is legally vacant, owner-occupied or licensed.
  • The shop’s heating, hot-water and lighting systems.
  • Each residential unit’s heating, insulation and windows.
  • Common parts, roof, walls and service routes.
  • Fire separation, ventilation and access arrangements.
  • Who owns and controls each relevant building element.

A conversion or refurbishment can also trigger planning, Building Regulations, EPC and operational compliance requirements. Planning permission is not Building Regulations approval.

Energy assessor inspecting a mixed-use property

Illustrative image only.

Typical capital expenditure

Potential expenditure may include:

  • Boilers, heat pumps and heating controls.
  • Hot-water systems.
  • LED lighting and sensors.
  • Glazing and external doors.
  • Roof, wall, floor and loft insulation.
  • Roof or fabric repairs required before insulation.
  • Ventilation and air-conditioning systems.
  • Smart meters and sub-metering.
  • Building management systems.
  • Solar panels and other renewable technologies.

An EPC recommendation is not a building survey or a guaranteed works specification. It may not identify defects, access limitations, tenant disruption, fire-compartmentation issues or compatibility problems.

Commission an energy assessment and building survey. Assess the whole-life cost, maintenance requirement, disruption, payback and interaction with other planned works. Listed-building or conservation-area restrictions may limit the available measures.

MEES exemptions

MEES exemptions are fact-specific. They may be time-limited, require evidence and may need renewal. Where required, they must be registered on the PRS Exemptions Register.

At a high level, commercial exemptions can include:

  • Seven-year payback: the recommended measure or package does not meet the prescribed payback test.
  • All improvements made: all relevant improvements have been installed, or no further relevant improvement can be made, but the property remains below EPC E.
  • Wall insulation: expert evidence shows that insulation would damage the building fabric or structure.
  • Third-party consent: required consent from a tenant, superior landlord, mortgagee, freeholder or planning authority cannot be obtained.
  • Property devaluation: an independent RICS-registered valuer confirms that the works would reduce market value by more than 5%.
  • Temporary new-landlord exemption: certain new landlords may have a six-month temporary exemption.

The seven-year payback exemption normally requires evidence such as installer quotations and calculations. Exemptions commonly last five years, although the precise period depends on the exemption. A temporary new-landlord exemption is generally six months.

Do not import domestic MEES rules into a commercial asset. The domestic £10,000 cost-cap figure is not a commercial rule. For commercial property, apply the relevant regulations and official guidance, including the prescribed payback and exemption requirements.

An exemption does not improve the EPC, remove the covenant or guarantee lender or tenant acceptance. A registered exemption may also cease to be effective on a transfer, requiring the new owner to reassess the property.

Who pays? Lease and cost recovery

Commercial leases may be full repairing and insuring, internal repairing and insuring, or hybrid arrangements.

A repairing covenant does not automatically make the tenant responsible for energy improvements. Review:

  • Repair and reinstatement obligations.
  • Service-charge wording and caps.
  • Whether improvement costs are recoverable.
  • Reasonableness requirements.
  • Access rights.
  • Alterations and consent provisions.
  • Ownership of installed equipment.
  • Dilapidations and removal obligations.
  • Insurance and interruption provisions.
Work Likely cost bearer Questions to ask
Roof or wall insulation Often landlord Is it repair, improvement or redevelopment?
Shop lighting Landlord or tenant Is it a fixture, tenant fit-out or service charge item?
Boiler replacement Depends on lease and system ownership Who maintains, replaces and controls the system?
Windows and doors Often landlord Are listed-building or freeholder consents required?
Solar panels or heat pumps Negotiated Who owns the equipment and receives the benefit?

The landlord may fund the work while the tenant receives lower energy bills. Alternatively, costs may be recovered through rent or service charge where the lease permits. Do not assume recovery without reviewing the lease.

Capital allowances and tax

Qualifying plant and machinery may receive capital allowances. The EPC improvement itself does not automatically qualify.

Heating, lighting, electrical systems and other integral features require classification and supporting evidence. Structural fabric usually has different treatment. Qualifying non-residential construction, conversion or renovation expenditure may fall within the Structures and Buildings Allowance, subject to the relevant conditions.

Second-hand fixtures may require a valid section 198 election and appropriate records. The purchase contract should not leave capital-allowance evidence unresolved.

Tax treatment depends on the ownership structure, property use, timing, VAT position and documentation. A limited company, LLP and individual ownership can produce different outcomes for income tax, corporation tax, financing, extraction and reporting.

Tax-efficient property investment planning may include identifying plant allowances, reviewing SBA eligibility, timing qualifying expenditure and selecting an appropriate structure. These are planning considerations, not guaranteed tax savings. Specialist tax advice is required before relying on them.

Worked illustrative examples

Example A: F-rated shop

Assume an F-rated commercial shop requires an initial improvement budget of £15,000 to £40,000 to target EPC E. This is illustrative only and is not a quotation. An assessor may conclude that the works are insufficient or that different measures are required.

If the landlord spends £25,000, the cash return is reduced by that amount. The investment model should also include rent, finance, voids, tax, VAT, professional fees and future reserves.

Example B: year-one capex

Assume:

  • Purchase price: £500,000.
  • Annual rent: £60,000.
  • Loan: £375,000, representing 75% LTV.
  • Interest-only rate: 6%.
  • Annual interest: £22,500.
  • Operating costs: £12,000.
  • Year-one MEES and energy capex: £25,000.

Year-one cash before tax is:

£60,000 – £22,500 – £12,000 – £25,000 = £500

Without the capex, the simplified figure would be £25,500 before tax. This excludes SDLT, VAT, fees, voids, tax, reserves and other financing costs.

Example C: rent reduction

If rent falls by 10% to £54,000, with no capex, the simplified cash before tax is £19,500.

If the £25,000 capex is also required in year one, the result becomes negative £5,500 before tax.

This is why reserves are required even where the property appears to produce a high yield.

Due diligence checklist

Before exchange, review:

  • EPC register entry and certificate expiry.
  • MEES applicability and PRS Exemptions Register.
  • Energy assessor report and recommendations.
  • Building survey and M&E condition.
  • Lease repair, service-charge, alteration and access clauses.
  • Tenant consent and works disruption.
  • Planning, listed-building and conservation restrictions.
  • Building Regulations, fire safety, ventilation and asbestos.
  • Separate commercial and residential systems and titles.
  • Current and future capex budget, contingency and payback.
  • Lender requirements, valuation and refinance impact.
  • Capital allowances, VAT and supporting records.

Apply the Four Pillars

Realty Packaging assesses property risk through four connected areas:

  1. Lease
  2. Planning
  3. Building condition
  4. Operational compliance

EPC and MEES risk should be mapped across all four. An energy rating cannot correct a defective title, poor lease, unlawful use or serious building defect.

Red flags

  • No EPC or expired EPC.
  • F or G rating without a registered exemption.
  • Exemption based only on verbal statements.
  • Works estimate prepared without a site inspection.
  • Lease unclear on cost recovery or access.
  • Roof, fabric or heating systems near the end of their service life.
  • Listed-building constraints.
  • Seller’s yield excludes capex or voids.
  • Refinance assumes a future EPC target that is not law.
  • Residential upper units treated as automatically subject to commercial MEES.

Sources

This article is educational only. It is not legal, surveying, energy, tax, financial or investment advice. Current law and guidance should be checked before making a transaction or commissioning works.

Conclusion

Energy performance is an income, capital expenditure, lease and compliance issue. The EPC score is only the starting point.

Investors should identify the works, confirm who pays, test the effect on cash flow and review the property through the lease, planning, building condition and operational compliance pillars. This supports informed commercial property due diligence and disciplined property portfolio growth UK strategies.

For support with commercial property investment UK opportunities, contact support@realtypackaging.co.uk, Rachel on +44 20 4513 2218, or visit realtypackaging.co.uk.