The UK government has a target to reduce greenhouse gas emissions by at least 80% by 2050, compared to the 1990 baseline. As domestic buildings were responsible for 25% and non-domestic buildings for 12% of total carbon emissions in 2009, improving their energy efficiency is central to achieving the target.

Pursuant to requirements in the Energy Act 2011 (“the Act”), the Department of Energy and Climate Change (“DECC”) drew up regulations prescribing a minimum level of energy efficiency for the domestic and non-domestic private rented sector in England and Wales.

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“the Regulations”) became law on 26 March.

Basic Restriction

Subject to certain exemptions, landlords of private rented properties may not:

  • grant a new tenancy/renew an existing tenancy after 1 April 2018; 
  • continue any existing letting of domestic property after 1 April 2020; or 
  • continue any existing letting of non-domestic property after 1 April 2023;

where a building’s energy efficiency falls below the minimum standard, being an Energy Performance Certificate (“EPC”) rating of “E”.

The Regulations apply to all buildings requiring EPCs (broadly those with heating or air conditioning systems, except those due to be demolished).

Domestic private rented property encompasses property let on an assured or regulated tenancy excluding certain low-cost social housing, including certain agricultural tenancies. Non-domestic private rented property is property let on a tenancy which is not a dwelling.

Exemptions and Non-Compliance

These are few, but include:

  • where third party consent is required for any necessary works, but is withheld;
  • where an independent surveyor confirms that necessary works will reduce the property’s market value by more than 5%;
  • for non-domestic properties, leases that are either under 6 months (unless already renewed twice) or originally granted for over 99 years; and
  • where the cost of necessary works (including interest) exceeds the expected energy savings (“the golden rule”). For non-domestic property, this is over a maximum seven year period.

Where a landlord relies on an exemption to let a property, details should be added to an online exemptions register, which will be open to public inspection and used by local authorities to monitor compliance.

Where the Regulations are breached a tenancy will remain valid but penalties will apply. For example, renting out a sub-standard domestic property for over three months will attract a fine of up to £4,000. The fine for renting out a non-domestic property for the same period will be the greater of £10,000 and 20% of the property’s rateable value, capped at £150,000. In each case, the breach will be published on the register, with the additional reputational damage.

Landlords will enjoy a six-month grace period for improvements where they are not at fault for delayed compliance, for example where a lease is granted pursuant to a court order or by operation of law.

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Key Observations

The effect of the Regulations will be far-reaching. Approximately 13.5% of all private rented properties currently have an EPC rating of “F” or “G”, rising to 20% in the context of commercial property.

Energy efficiency is likely to feature much more prominently in investment pricing, rent reviews and lending decisions.

Prospective landlords should implement necessary changes in good time to take advantage of void periods and on-going maintenance and plant renewal.

Consideration should be given to improving properties beyond the minimum standard, where appropriate, as the minimum “E” level of energy efficiency is expected to be subject to gradual increase over time.