Imagine a landlord facing a £400,000 programme to upgrade a building’s fabric and services as energy standards tighten. The work may protect the building’s rental prospects for years to come. A tenant with three years left on its lease pays the energy bills the upgrade would reduce, but may have vacated long before the capital cost could be justified by its own savings. Neither party is being unreasonable by looking after its own position. The problem is structural: the party who has to spend the money and the party who benefits from spending it are frequently not the same party, and commercial leases were mostly not written with that mismatch in mind.
This article concerns England and Wales, where the non-domestic Minimum Energy Efficiency Standards (MEES) regime applies. Scotland and Northern Ireland operate different frameworks, and a UK-wide portfolio cannot assume the same obligations apply to every building.
The rule that turns efficiency into a legal deadline
The existing minimum is already enforceable. Since April 2018, landlords of privately rented non-domestic property within the regulations have generally been unable to grant or renew a tenancy where the EPC rating is below E without a valid exemption. Since April 2023, the prohibition has also applied to continuing lettings. The government’s MEES landlord guidance explains which properties are covered and how exemptions work. An occupied building rated F or G is not protected from the existing rules merely because the tenant has several years left to run on its lease.
The next stage is different. In its 18 June 2026 interim response, the government set out its intention to require privately rented non-domestic buildings over 1,000 square metres to achieve EPC B from 2031 where cost-effective, while leaving smaller premises subject to the current EPC E minimum. The proposed EPC C milestone for 2027 has been abandoned, and the existing seven-year payback test and exemption mechanisms are intended to continue. But the EPC B requirement has not become law: secondary legislation is still needed and the detail of implementation is not fully settled. Treating 1 April 2031 as an already enacted deadline, or suggesting every commercial building must reach B, would misstate the present position.
Nor does a proposal have to be law before it affects a property transaction. A purchaser, lender or prospective occupier considering a large building today may want to know what an upgrade would cost, whether the lease allows it to happen and whether the asking rent or capital value leaves room for that expenditure. JLL’s July 2026 research estimated that 69% of the industrial space it assessed within the proposed regime was below EPC B. That is not a national estimate for all commercial buildings, still less a forecast of how much every owner will have to spend. It shows why the question is already material in parts of the investment market despite the outstanding legislation.
Why the cost and the benefit land on different people
The split-incentive problem is not unique to energy efficiency works — it has a family resemblance to the service-charge allocation problem whenever a landlord invests in long-life plant that a tenant on a shorter lease will not occupy long enough to benefit from. What makes retrofit distinctive is that the benefits land in different places. Lower consumption may benefit the business paying the energy bill, while a better-rated building may benefit the owner through future lettability, reduced obsolescence risk and possibly value. Where the landlord purchases energy for shared services, the calculation is different again. Before anyone argues about a fair contribution, the parties have to establish who pays for the energy, who owns and maintains the equipment, and who can actually capture the savings.
The variation is documented rather than theoretical. Government-commissioned research published in February 2025, drawing on a 2021–22 survey of more than 600 tenants and interviews with 37 landlords, occupiers and specialists, found that 60% of surveyed tenants paid their premises’ energy bills, while landlords were reported as responsible for the capital cost of glazing improvements in 56% of responses to that question. The proportions changed by the equipment involved; lighting and building fabric did not produce the same allocation. A negotiation based on the familiar assumption that the landlord funds everything and the tenant saves everything is therefore too crude even before the terms of an individual lease are considered.
The regulatory payback calculation is not the same as the commercial bargain. The seven-year test asks, broadly, whether recommended improvements can meet the cost-effectiveness measure under the regulations. It does not require a tenant with three years remaining to agree to fund works on the basis of savings that another occupier may enjoy in years four to seven. Nor does a better EPC rating guarantee the predicted reduction in that tenant’s bills: actual consumption, hours of operation, tariffs and metering affect what is saved. A landlord may still have a compelling investment reason to proceed, because the works protect income after the present occupier leaves. That is precisely why dividing the cost according to the benefit, rather than treating the regulatory test as a payment formula, matters.
What can, and generally cannot, be recovered
The starting point under most commercial leases is the familiar distinction between repair and improvement. Replacing a failed system with its modern equivalent may be recoverable where the lease allows the cost of repairs and replacement; installing a substantially enhanced system chiefly to improve the property’s future performance may be harder to charge to occupiers without an express entitlement. The RICS Service charges in commercial property standard, second edition, effective from 31 December 2025, recognises that improvements supported by properly assessed alternatives and a cost-benefit case over tenants’ lease terms can justify a contribution. It does not override the lease or turn energy savings into an automatic right of recovery. The standard also makes a distinction worth preserving: obtaining an EPC is not normally a recoverable service-charge cost, even though qualifying work to improve efficiency may in some circumstances be recoverable.
A single retrofit project can contain both necessary replacement and an optional enhancement. The landlord might need to replace worn-out plant regardless of its energy rating, but choose a more expensive specification to protect the property’s long-term position. The recoverable element cannot safely be decided from the contractor’s overall invoice or the presence of an efficiency benefit alone. The opposite assumption is no better: if a landlord funds improvements outside the service charge, a later rent review or renewal may reflect the improved building, depending on the lease’s assumptions and disregards. RICS commentary on MEES and commercial leases points to the risk of a tenant paying twice for the same works. The relevant question is how the agreed lease terms, cost recovery and rental valuation fit together, not which side can attach the most persuasive label to the expenditure.
Green lease clauses, and their real limits
The most direct contractual response is a green lease clause: provisions requiring landlord and tenant to cooperate on energy performance, share consumption data and, where appropriate, agree the cost and timing of improvements. The Better Buildings Partnership’s Green Lease Toolkit, refreshed in March 2026, offers a more useful starting point than a vague promise to act sustainably. Its suggested approach contemplates fixed tenant contributions or arrangements tied to savings actually expected during occupation, with the parties negotiating how much of the capital cost should be shared. Such provisions can be valuable when a lease is granted or renewed, but they do not retrospectively amend an older agreement, and sharing data is not the same as agreeing to pay for new plant.
Their real limit is coverage, not design. Many leases still running towards 2031 were agreed without a workable mechanism for dividing the cost of energy improvements, or for providing the access needed to carry them out without disrupting the occupier’s business. A landlord can have the money and a sound technical programme but lack the necessary right or practical opportunity to complete it during the tenancy. Under the present EPC E regime, inability to obtain required third-party consent despite reasonable efforts may support a registered exemption in defined circumstances; it is not an automatic exemption, and the future EPC B arrangements have yet to be finalised. A landlord and tenant considering a renewal now can negotiate consent, timing, disruption, evidence of savings and a proportionate contribution while both still have something to gain. Waiting until a regulatory or lease event is imminent often leaves less room to do any of those things sensibly.
The broader legal review sitting alongside this
The energy-efficiency proposals sit alongside, but are legally separate from, the Law Commission’s continuing review of commercial leasehold law. Its June 2026 consultation on business-tenancy renewal included questions about environmental improvements and how renewal terms or grounds of opposition might respond to them. That consultation closed in September and no resulting change to existing lease rights has yet been enacted. It should not be read as a reason to postpone current negotiations or as a mechanism that will automatically give landlords access or charging rights when the proposed 2031 standard approaches. Those remain matters for the law and leases actually in force.
Planning around a deadline that is already shaping the market
The practical answer to who should pay for a retrofit programme is rarely a clean allocation to one side. It tends to be settled through negotiation shaped by the lease term, the precise works, the evidence of energy savings, the landlord’s longer-term investment interest and the leverage each party has when the conversation happens. For a larger building with a credible EPC B gap, a landlord who waits until close to the proposed 2031 horizon may find itself needing tenant cooperation at the same moment buyers, lenders and prospective occupiers are scrutinising the likely capital requirement. A landlord who addresses the position at a renewal or regear has more opportunity to distinguish work it must fund to preserve the asset from improvements the sitting tenant can reasonably share in because it will benefit from them. The difficulty is not that one party is refusing to recognise an obvious saving. It is that the saving, the cost and the ability to undertake the works may belong to different parties for different lengths of time — and the lease is where those differences have to be reconciled.
This article provides general information and analysis about non-domestic energy efficiency and commercial leasing in England and Wales, not legal, regulatory, financial, tax, valuation or investment advice. The proposed 2031 EPC B requirement is subject to further legislation, and compliance, exemptions, access and cost recovery depend on the property and its lease. Specialist advice should be obtained before committing to or allocating major retrofit expenditure.
