Under the Energy Act 2011, the government has made regulations requiring properties to be of a certain standard of energy efficiency before a landlord can grant (or renew) a lease. The regulations apply to all private sector lettings (both residential and commercial, but excluding social housing).

The regulations are expected to come into force on:

  • 1 April 2018 for new lettings or renewals granted on or after that date;
  • 1 April 2020 for all private rack rent residential tenancies then existing; and
  • 1 April 2023 for all other lettings then existing.

The following commercial lettings are excluded:

  • lettings for 6 months or less (provided the granting of the tenancy does not mean the tenant will have occupied the property for more than 12 months); and
  • lettings for 99 years or more.

The regulations will not apply to any building that is exempt from the requirement to obtain an energy performance certificate (for example, a listed building, or a building that's about to be demolished).

The minimum energy-efficiency standard is to be an E rating, as shown on the energy performance certificate for the relevant property.

It is thought that only around 18% of buildings have a rating lower than an E, which suggests that most lettings will not be adversely affected by the regulations. However, concern has been raised over whether standards will be tightened in the future, either through raising the threshold to a D or C rating or by making the ratings themselves more stringent.

There are civil penalties for non-compliance of up to £150,000 for commercial lettings.

Exemptions

Exemptions may be relied on only if the landlord has registered the relevant information on the PRS Exemptions Register set up by the Department for Energy and Climate Change.

A landlord will be allowed to claim an exemption if:

  • all possible energy-saving improvements have been made in respect of which the consequential expected energy bill savings exceed or equal the cost (including the cost of finance) of the work (this is the "golden rule" that would qualify an improvement for funding under the government's green deal scheme); or
  • (in the case of a non-domestic property) all possible energy-saving improvements have been made that would achieve a "payback" of seven years or less (that is, the expected energy bill savings over seven years exceed or equal the cost (including the cost of finance) of the work); or
  • (in the case of a domestic property) all possible energy-saving improvements have been made that can be wholly financed by other means, but at no cost to the landlord.

There will also be an exemption where a landlord has been unable to carry out the necessary work because the consent of a third party (for example, a tenant, a lender, a superior landlord, the planning authority) is required and that consent has been denied (or has been granted subject to unreasonable conditions).

Only those works that were denied consent would not have to be installed. Those improvements within a package that do not need consent, or for which consent has been obtained, would still need to be carried out.

Also exempt are works that would (as stated in a report prepared by an independent surveyor) result in a reduction of more than 5% in the market value of the property, or of the building of which it forms part.

Wall insulation work is exempt if a professional opinion is obtained advising that it has a potential negative impact on the fabric or structure of the building.

Each exemption will last only for a maximum period of 5 years from the date of registration. After that the landlord must either demonstrate that the relevant exemption still applies to the property or carry out the work.

There is a temporary exemption of six months for anyone buying a property subject to an existing, non-complying tenancy. In other words, an exemption relied on by the seller will not transfer to the buyer. The buyer has six months in which it must either comply with the regulations or establish a fresh exemption.

There are also temporary exemptions of six months where a lease is granted:

  • under a contractual obligation (here it would seem that the government has in mind matters such as, for example, the exercise of an option to renew);
  • on a tenant's insolvency, by virtue of the landlord having been the tenant's guarantor;
  • under the overriding lease provisions of section 19 of the Landlord and Tenant (Covenants) Act 1995;
  • by operation of law (for example, by way of a surrender and regrant);
  • under the 1954 Act lease renewal procedure; or
  • by court order.