Real estate businesses have seen a number of significant changes in recent years driven by government policy and European legislation aiming to improve the energy efficiency of our buildings. Most recently, new minimum energy efficiency standards for privately rented properties gained parliamentary approval prior to the dissolution of parliament. With the General Election upon us, we review the impact of the new standards on the real estate sector and also the measures being proposed by the main parties which may form the policy of the next government.
New Regulations on Minimum 'E' EPC Rating confirmed
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 will come into force on 1 April 2018 requiring landlords of privately rented commercial properties in England and Wales to achieve energy performance of their buildings of at least an "E" Energy Performance Certificate (EPC) rating. Similar standards for residential properties have been introduced under the Regulations.
The government estimates that changes to energy efficiency requirements will impact around 360,000 properties in the private rented sector, which currently have an “F” or “G” EPC rating.
From 1 April 2018, landlords will be unable to grant or renew tenancies of commercial properties which fall below the EPC rating of “E”. This minimum standard will apply equally across all types of commercial buildings. From 1 April 2023, landlords are also prohibited from letting properties under existing tenancies if the EPC rating for the property falls below the prescribed standard. These energy efficiency standards will not, however, apply to tenancies which are for less than 6 months or which are greater than 99 years.
Similarly, 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.
Of particular significance for the residential sector is the right for tenants living in “F” and “G” rated homes to request consent from the landlord or the superior landlord to allow the tenants to carry out specific energy efficiency measures (known as "the tenant's request") from 1 April 2016. Neither the landlord nor superior landlord can refuse unreasonably to consent to relevant improvements.
Landlords are not expected to bear the cost of energy efficiency improvement measures which are requested by tenants and the Regulations require any relevant improvement works to be funded through financial arrangements such as the Green Deal, or wholly or partly by the tenants themselves. However, there is some concern in the sector that landlords may ultimately bare some of the cost of the improvements requested by their tenants.
Certain exemptions are 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 i.e. the value of savings of the relevant energy efficiency improvement measures would not achieve a simple payback through energy savings within 7 years.
- All energy efficiency improvement measures that would meet the "Golden Rule" (a concept developed through the Government's Green Deal initiative) have been undertaken. Under the Gold Rule, the cost repayments for improvements (including interest charges) must be the same or less than the expected energy savings throughout the expected lifetime of the improvements or a specified pay-back period.
- Third party consent to carry out improvements has been denied to the landlord, e.g. from a mortgagee, a local authority or a tenant who refuses to agree to improvements.
- In the opinion of a qualified expert, the measures will devalue the price of the property by 5% or more.
To rely on any of the above exemptions, landlords will need to register the information on a central "Private Rented Sector (PRS) Exemption Register".
Where a local authority considers that a residential landlord may be in breach of the Regulations it may impose a fixed civil penalty. Under the Energy Act 2011, the maximum penalty for non-compliance in respect of residential properties is £5,000.
Civil penalties 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.
Significantly, authorities also have the power to publish information regarding non-compliance, which may have significant reputational implications for some landlords.
General Election 2015
As illustrated by our energy timeline, the minimum energy efficiency standards are part of a broad strategy to improve the energy efficiency of buildings and meet our national and international climate change targets.
The new European Commission, appointed on 1 November 2014, has confirmed its support for ambitious energy efficiency targets for buildings beyond 2020. Stuart Wardlaw, Partner, commented:
“It is likely that this trend will resonate in domestic politics following the UK general election on 7 May 2015, irrespective of which party or parties come to power. Across much of the political spectrum, the election manifestos indicate the will to promote the energy efficiency agenda, particularly in respect of homes suffering from serious fuel poverty.”
As part of its election campaign, the Conservative Party has promised to support low-cost measures on energy efficiency, with the goal to insulate a million more homes over the next five years and ensure that every home and business is fitted with a Smart Meter by 2020.
The Liberal Democrat Party has sought to appeal to voters with their set of five green laws, one of which will require all social and private rented housing to meet EPC rating band "C" by 2027. The proposed "Green Buildings Act" will also include a Council Tax discount for significant improvements in energy efficiency homes, and introduce further regulations to reduce heat and energy use.
The Labour Party intends to deliver one million interest free loans for energy home improvements with a promise to work with local authorities to update energy efficiency in low income households.
Ambitious measures have also been tabled by the Green Party which promises to provide a free nationwide retrofit insulation programme and a requirement for private sector housing to meet an EPC rating band "C" by 2025. The Party also intends to establish mandatory standards for commercial building performance, e.g. ISO 5001, and allow Councils to insist that communal heating schemes are implemented where practicable.
While the speed at which regulatory changes are implemented will vary depending on the shape of the next government, there is no question that landlords across the real estate sector will be expected to play a bigger role in meeting climate change targets. Consequently, Landlords should review the energy efficiency of their buildings now in order to prepare for future changes.