In February 2015 Smart Buildings Magazine highlighted the Government's new energy efficiency regulations (http://www.smartbuildingsmagazine.com/news/energy-regulations-required?keyword=EPC). Here, John Staheli of Nabarro gives an update.
Described as "game-changing" by the Government, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the "Regulations") are now law.
Subject to some exceptions, from 1 April 2018 it will be unlawful for a landlord to lease a commercial property that is covered by the Regulations and that has an energy performance certificate ("EPC") rating below an "E". From 1 April 2023, this rule will also apply to existing leases.
Properties that do not need an EPC under the EPC regulations, and ones which are subject to leases granted for either six months or less (provided that the same tenant has not occupied the property for over 12 months), or 99 years or more, will fall outside the scope of the Regulations.
The minimum level of energy efficiency is an EPC rating of "E". A property is defined as "sub-standard" if it falls below this level.
The basic rule
From 1 April 2018, a landlord of sub-standard property must not let that property unless either:
- it has made all the "relevant energy efficiency improvements" to the property; or
- no such improvements can be made; or
- an exemption applies.
From 1 April 2023, this requirement will extend to all leases, including those that currently exist on that date.
Relevant energy efficiency improvements
Relevant energy efficiency improvements are those which:
- fall within prescribed classes; and
- have been recommended in an EPC recommendations report or a surveyor's report; and
- would achieve a simple payback of seven years or less.
The "simple payback" requirement means that the proposed measure will, over a period of seven years, achieve savings in energy bills equal to or greater than the cost of purchasing and installing the improvement, plus an amount representing the cost of money.
There are three major exemptions:
- the landlord has carried out all relevant energy efficiency improvements to the property or no such improvements can be made;
- the landlord is unable to obtain all necessary consents for the works despite reasonable efforts (or such consent is granted subject to unreasonable conditions); or
- any improvements would devalue the property's market value by 5% or more (in the opinion of an independent surveyor).
Necessary consents include the consent of a tenant, superior landlord or mortgagee as well as statutory consents such as planning permission.
However, these major exemptions only last for five years from the date when the landlord establishes that the exemption applies, after which the landlord will need to re-establish its right to an exemption. The landlord must register any exemption on a centralised register.
There are also a number of short-term exemptions, intended to cover situations in which the landlord has no choice about granting the lease (for example, statutory renewals), or where the landlord acquires a property which is subject to an existing lease. In such circumstances, the landlord's obligations do not apply until six months after the trigger event. This is to give the landlord a temporary window to assess what works are required and either to implement them or to register one of the major exemptions, for example where the tenant refuses its consent.
A breach of the Regulations carries some hefty fines. A breach of up to three months could incur a £50,000 fine and a breach of three months or more could result in a maximum £150,000 fine, plus a publication penalty, in both cases leading to bad publicity. At least, however, there are no criminal sanctions. The Regulations will be policed by local trading standards departments.
Many aspects of the Regulations (for example, what would constitute "reasonable efforts" to obtain consent) remain unclear and the property industry will have to await further official guidance (expected soon).
However, even though various points of detail remain unresolved, the direction of travel is clear. Now is the time to start preparing:
- If property owners and tenants have not done so already, they should audit their portfolios to work out which properties are (or may be at risk of becoming) sub-standard for the purposes of the Regulations.
- Check how robust any existing EPC ratings are. It may be possible to upgrade them.
- Use void periods and planned maintenance programmes to carry out relevant energy efficiency improvements.
- Landlords and their lawyers will need to review standard forms of lease.
- If you're buying an investment property, consider carefully whether you will be able to let, or continue to let, the target property without incurring substantial costs.
- As the statutory deadlines approach, the demand for the manufacture and installation of energy efficiency improvements is likely to increase and landlords who delay may suffer from supply constraints.
The UK has committed to an 80% reduction in carbon emissions by 2050. The Regulations form part of a sustained targeting of the built environment which has, in recent years, brought about EPCs, the CRC Energy Efficiency Scheme, the Energy Efficiency Opportunity Scheme, the District Heat Network Regulations and a continuous ratcheting-up of Part L of the Building Regulations. The minimum energy efficiency Regulations are set to be reviewed in 2020, but property owners and occupiers need to act now.