Under MEES an F or G unit is unlettable or an inherited compliance problem. Price the full cost of compliance, then gross it down for purchaser's costs.
Price a sub-E EPC as the full cost of making the units lettable, not just the works: works and fees, the extra void or rent concession while they are done, new EPCs and a contingency, then divide by one plus purchaser's costs to turn it into a price reduction. On an illustrative 9,500,000 multi-let industrial estate with one vacant F unit and one let G unit, that is 461,317 of cost and a price reduction of 431,944, 4.55 per cent, moving the net initial yield from 6.31 to 6.61 per cent.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Under the Minimum Energy Efficiency Standards in England and Wales, a landlord has been barred since 1 April 2018 from granting a new lease of non-domestic property with an EPC rating of F or G, and since 1 April 2023 from continuing to let one, unless a valid exemption is registered. Exemptions are registered by the landlord on the PRS Exemptions Register and generally last five years; a buyer should not assume a seller's exemption covers it. For a buyer, a sub-E unit is therefore either unlettable (if vacant) or a compliance problem it inherits on completion (if let). Both cost money that the vendor's asking price does not reflect.
| Input | Value |
|---|---|
| Asking price / passing rent / purchaser's costs | 9,500,000 / 640,000 / 6.8% |
| Unit A, vacant, EPC F: market rent / works to reach a compliant rating | 95,000 / 180,000 |
| Unit A: extra months empty while works are done / holding cost a month | 4 / 2,000 |
| Unit B, let, EPC G: rent / works with the tenant in occupation | 82,000 / 140,000 |
| Unit B: rent concession for disruption | 50.0% for 3 months |
| Professional fees on works / contingency on works | 12.0% / 15.0% |
| New EPC assessments | 2 × 2,500 |
Units C to F are rated D or E and comply today. The works costs should come from the buyer's building surveyor and an energy assessor's recommendation report, not the seller's estimate.
| Item | Working | Cost |
|---|---|---|
| Unit A works and fees | 180,000 + 12.0% (21,600) | 201,600 |
| Unit A extra void | 4 months of 95,000 | 31,667 |
| Unit A holding costs | 4 × 2,000 | 8,000 |
| Unit B works and fees | 140,000 + 12.0% (16,800) | 156,800 |
| Unit B rent concession | 82,000 × 3/12 × 50.0% | 10,250 |
| New EPCs | 2 × 2,500 | 5,000 |
| Contingency | 15.0% × 320,000 of works | 48,000 |
| Total | 461,317 |
Unit B is the one to watch. It provides 12.8 per cent of the rent roll, and since 1 April 2023 continuing to let it below E without a registered exemption is itself a breach. Enforcement is by local authorities, with civil penalties for non-domestic property based on rateable value and capped at 150,000 pounds per breach. Until the works are done the unit also cannot be re-let if the tenant leaves. Doing them now, with the tenant in place, costs a concession but cures the breach and protects the renewal.
Price reduction = cost ÷ (1 + purchaser's costs) = 461,317 ÷ 1.068 = 431,944
Adjusted price = 9,500,000 − 431,944 = 9,068,056 (4.55% off)
Net initial yield = 640,000 ÷ (price × 1.068): 6.31% at the asking price, 6.61% at the adjusted price
Excel: =461317/(1+6.8%)
The division matters: each pound off the price also saves the stamp duty, agent and legal costs charged on it, so a buyer who knocks off the full 461,317 has over-recovered. The reduction moves the yield by 30 basis points, which is how it will be argued with the vendor's agent. The net initial yield with purchaser's costs sets out the gross-up.
The legal minimum is E. The government has consulted on raising it for non-domestic property, including a proposed B by 2030, but that is a proposal, not law, so it belongs in the underwriting as a scenario rather than in the base case. Assume the four compliant units each need 60,000 of works (C) or 95,000 (B) in year 4, plus fees, discounted at 7.5 per cent.
| Scenario | Extra cost, present value | Total cost | Price reduction | % of price | NIY at adjusted price |
|---|---|---|---|---|---|
| E only (base) | 0 | 461,317 | 431,944 | 4.55% | 6.61% |
| C in year 4, 50% likely | 100,639 | 561,955 | 526,176 | 5.54% | 6.68% |
| C in year 4, certain | 201,278 | 662,594 | 620,407 | 6.53% | 6.75% |
| B in year 4, certain | 318,690 | 780,006 | 730,343 | 7.69% | 6.83% |
The base case is a legal fact; the others are judgments. Keep them apart in the negotiation: the 431,944 is a cost any buyer bears, while the future standard is a risk a competing bidder may price differently. Expect the vendor to concede the first and argue the second.
Deducting only the works. The surveyor's 320,000 is 69.4 per cent of the true cost; the void, concession, EPCs and contingency add 141,317. The opposite mistake is treating every F or G unit as unlettable forever and capitalising the lost rent, when most can be brought to E for a known sum. Price the sum, check whether a valid exemption genuinely applies, and if the vendor will not move, ask for a retention against the works instead.
Illustrative, not legal advice. Check each unit's EPC on the public register, whether any exemption is registered and by whom, and which units fall outside the regulations. Scotland has its own regime.
A sub-E EPC is a priced finding like any other: cost of compliance divided by one plus purchaser's costs, here 431,944 or 30 basis points of yield, with a stricter future standard shown separately. The book treats each diligence finding as something to be priced and closed; the free workbook for the book shows which findings paid for the diligence.
In England and Wales, not without a valid registered exemption: new lettings have been barred since 1 April 2018 and continuing lettings since 1 April 2023. In the worked estate that makes a vacant F unit unlettable until 201,600 of works and fees are spent, plus 31,667 of rent lost over a four-month extra void.
No. Add the void, concessions, new EPCs and a contingency, then divide by one plus purchaser's costs, because a lower price also saves costs charged on it. In the worked case 320,000 of works becomes 461,317 of total cost and a 431,944 price reduction at 6.8 per cent purchaser's costs.
As a separate, probability-weighted scenario, not as part of the legal-minimum cost. In the worked estate a C standard in year 4 with a 50 per cent likelihood adds 100,639 in present value and takes the price reduction to 526,176; a certain B standard takes it to 730,343, 7.69 per cent of the price.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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