Legislation to provide for energy efficiency rating for lettings of properties, both commercial and residential in the UK has been passed and will come into force on 1 April 2018. The Energy Efficiency (Private Rented Property) (England and Wales) regulations have recently been approved by both Houses of Parliament.

Under part three of the regulations landlords will now no longer be able to rent out a building which has an EPC energy efficiency rating lower than E unless certain exemptions apply. Given that it is estimated that 18% of commercially let property in the UK have ratings of F and G, this will have a significant impact.

In the case of commercial properties, the regulations will apply initially to the grant of new leases and also lease extensions and renewals as from 1 April 2018. As from 1 April 2023, the regulations will apply to existing leases. For residential properties, minimum energy efficiency standards will apply from April 2018 to new leases and from 2020 to all leases. 

The exceptions and exemptions are as follows:

  • The regulations will not apply for a lease term of six months or less with no provisions for renewal or leases of 99 years or more.
  • Properties which at present do not require an EPC are excluded from the regulations.
  • Landlords will be exempt from complying with the regulations in cases where a tenant has refused consent to works being carried out or where a third party consent is required and has been refused.
  • There is also an exemption if the steps that would need to be taken would reduce the value of the property by 5% or more.
  • The property will be exempt if the  required works do not meet the "golden rule" under the Green Deal which provides that borrowing is limited to the amount that would be covered by money saved on  fuel bills or over a seven-year payback period where Green Deal finance is not available.

Landlords will be well advised to have regard to the impact of these regulations and ensure that leases currently being negotiated give them the right to carry out the relevant works so that they will not find themselves in a position of being unable to let the property when the  regulations have come into force. They should also consider taking steps now to upgrade energy inefficient properties. 

It is important to note that there are significant penalties for non-compliance.  Landlords could be faced with a fine of the greater of £10,000 or 20% of the rateable value. The maximum penalty that can be imposed is £150,000.