Energy Efficiency Standards – New minimum energy efficiency standards

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Posted in:Corporate and Commercial|May 20, 2015 | Join the mailing list

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 will come into force on 1 April 2018 requiring landlords in England and Wales to achieve energy performance of their buildings of at least an ‘E’ Energy Performance Certificate
(EPC) rating.

Commercial Properties

From 01 April 2018

Landlords of commercial properties must upgrade the energy efficiency of their properties to at least band ‘E’  before the property can be leased to an existing tenant (where the property already has an EPC) or a new tenant; or within 6 months of a sale where
the obligation to improve the property is on the new landlord; and within 6 months from the date they became a landlord, where a tenancy is granted by operation of law.

From 01 April 2023

From this date the Regulations will start to apply to all existing lettings and not just to new lettings.  In other words if you do nothing about improving the energy efficiency of a non-compliant property, it will be a breach of the Regulations to allow existing
leases to continue where the rating is F or G subject to some-time limited exemptions that impose a high burden of compliance.

These energy efficiency standards will not, however, apply to Leases for less than 6 months (provided that the new tenancy does not mean that the tenant will have occupied the premises for 12 months or more in total) and Leases for more than 99 years.

But where a property did not need an EPC then it cannot be caught by the Regulations e.g. leases of buildings where the indoor climate is not controlled (no heating or cooling) and it is intended that listed buildings fall outside the ambit of the Regulations
but the amended EPC Regulations have never been very clear about listed buildings.

Where a lease was granted so long ago that it did not require an EPC at the time of the lease then it too will fall outside the Regulations but by April 2023 this is unlikely to account for many properties!

Residential Properties

Landlords will be unable to grant or renew tenancies of residential privately rented properties which fall below the EPC rating of “E” from 1 April 2018. From 1 April 2020 landlords are also prohibited from continuing to let properties under existing tenancies
if the minimum energy efficiency performances of such buildings fall below the prescribed standard.

Tenants in the residential sector living in “F” and “G” rated homes will also be able to request consent from the landlord to allow the tenant to carry out specific energy efficiency measures from 1 April 2016. Neither the landlord nor superior landlord can
refuse unreasonably to consent to relevant improvements. Landlord are not expected to bear the cost of energy efficiency improvement measures requested by tenants and the regulations require any relevant improvement works to be funded through arrangements
such as the Green Deal or by the tenants themselves.

Exceptions

There are some time limited exemptions and a few exclusions available to landlords of domestic and commercial properties which fall below the required standard where they are able to show that:

•    The measures are not cost effective  – the value of savings of the relevant energy efficiency improvement measures would not achieve a payback through energy savings within 7 years;
•    All energy efficiency improvement measures that would meet the “Golden Rule” have been undertaken
•    Third party consent to carry out improvements has been denied
•    If the measures will devalue the price of the property by 5% or more

To rely on any of the exemptions, landlords will need to register the information on a central Private Rented Sector Exemption Register.

Enforcement

Where a local authority considers that a residential landlord may be in breach of the Regulations it may impose a fixed penalty. The maximum penalty for non-compliance in residential properties is £5,000. Civil Penatlies for commercial properties may be based
on the rateable value of the property. Where a landlord has been in breach for less than three months, fines must not exceed 10% of the rateable value subject to a cap of £50,000. The level of fine will increase for breaches that exceed three months to 20%
of the rateable value subject to a maximum cap of £150,000.

What Cost?

In all probability the cost of ‘up-rating’ a property will rest generally rest with the Landlord, particularly in relation to existing leases. This is because, in the main, the cost of improvements falls outside most service charge regimes and are unlikely
to fall within a fairly standard tenant’s obligation to comply with statute. Marketability of properties with low EPC ratings will be more difficult unless the upgrading is inexpensive and easy to implement and so we expect that this could begin to affect
the valuations of properties with low EPC ratings and we can only assume that market rent reviews will be adversely affected.

What Should Landlords Do?

1.    Carry out an audit of your property portfolio now to ascertain how many buildings have an EPC rating below an ‘E’.  Where the EPC Rating is ‘F’ or ‘G’ (or is at risk of becoming so) implement a plan to improve the EPC rating for the property as part of
the investment and asset management.

2.    Use any void periods and lease breaks to carry out any improvement works required to the premises.

3.    Minimise capital costs by incorporating (to the extent possible) EPC improvements into planned refurbishment.

4.    Keep clear records of EPC risk management as this may have an impact on property/portfolio value on any sale and even the availability of any exemptions.

5.    Review your leases to see what rights you have to do works during the lease term and know which tenants you will have to negotiate with.

For more information about any of the above or for practical commercial advice on this or any other aspect of employment law, please contact
Ian Barker of the Berg Real Estate Team on 0161 833 9211 or email him at
Ianb@berg.co.uk.

(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal
advice should be obtained before taking, or refraining from taking, any action as a result of this article.)

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