The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “Regulations”), due to come into force on 1 April 2016, are expected to have a significant impact on the letting of commercial leasehold properties in England and Wales. The Regulations apply to both domestic and non-domestic properties, however this note focuses on commercial properties only.
Whilst the Regulations come into force next year, they are not due to take effect until April 2018. Landlords will therefore have a two year lead in period to assess their property portfolios and the extent of any works which may be required to ensure their properties comply with the minimum energy efficiency rating set by the Regulations.
Subject to certain exemptions (explained below) it will be unlawful for landlords to let commercial properties that do not have an energy performance certificate (EPC) rating of “E” or above.
Application of the Regulations
Most commercial properties are likely to be captured by the Regulations and landlords should, therefore, look at their portfolios now to assess the works required to bring them up to the required energy efficiency rating of E or above.
Currently the Regulations apply to all commercial properties that are required to have an EPC (therefore excluding, for example, agricultural or temporary buildings to be used for two years or less), and which are let for a term of more than six months and less than 99 years.
Tenancies of six months or less will only be excluded from the Regulations if the tenant has not been in continuous occupation for more than 12 months, or, the tenancy does not contain provisions for its renewal or extension.
In effect, the Regulations will capture all tenancies, other than very short-term or very long-term lettings.
The implementation of the Regulations is expected to be in two stages:
- New leases – 1 April 2018
From 1 April 2018 the Regulations will apply to all new leases granted.
- All existing leases – 1 April 2023
From 1 April 2023 the Regulations will extend to all occupied properties with leases in place for the remainder of the unexpired term.
Local Authorities will carry out enforcement of the Regulations against landlords.
Where a landlord lets, or continues to let, a property in breach of the Regulations, that breach will not affect the validity or enforceability of any provision of the tenancy between the landlord and the tenant.
Exemptions from the Regulations
There are a number of exemptions which may be available to landlords:
- Temporary exemption – where a landlord is a new purchaser of a property or a new lease is granted pursuant to the Landlord and Tenant Act 1954, the landlord will have six months to improve the property or demonstrate that another of the exemptions to the Regulations (mentioned below) applies.
- Devaluation exemption – where the landlord has obtained a report prepared by an independent surveyor confirming that the necessary improvements would result in more than a 5% reduction in the market value of the property, or the building of which it forms part.
- Cost-effectiveness exemption – if there is no upfront finance available for the improvement works (“Green Deal” discussed below) and the cost of the recommended improvement works would not be recouped over a period of 7 years, based on energy savings.
- The Green Deal is a form of financing product offered by authorised providers to help property owners secure upfront finance for carrying out energy efficiency improvements to properties to try to achieve an E rating efficiency. The cost of the works are then recouped from whoever is the electricity bill payer. There is currently no Green Deal finance available for commercial properties and therefore commercial landlords will currently be able to automatically satisfy the first limb of the cost-effectiveness exemption. In any event, the Department for Climate Change (DECC) has recently announced that the Green Deal may now be withdrawn entirely due to low take-up in the domestic sector and therefore only the 7-year cost effectiveness will be relevant for the exemption to apply.
- Consent exemption – where the landlord has been unable to improve the energy efficiency of the property due to the refusal of consent to the works being undertaken, despite the reasonable efforts by the landlord to obtain consent from an occupying tenant, lender or superior landlord (where applicable). It remains to be seen what will be deemed to be “reasonable efforts” made by landlords so as to obtain the necessary consents.
The Exemptions Register
- To be entitled to make a claim for an exemption, landlords will be required to pre-register their exemption on a centralised register (the Private Rented Sector Exemptions Register). The details of the exemption must be registered together with supporting documentation.
- It is anticipated, once registered, that most of the exemptions will last for 5 years. After this period a landlord would need to provide updated evidence in support of the exemption for it continue.
Penalties for breaching the Regulations
If a landlord is found to be in breach of the Regulations, the Local Authority can serve an enforcement notice imposing a financial penalty and/or a publication penalty.
- Financial penalty:
If in breach for less than 3 months – a financial penalty not exceeding whichever is the greater of £5,000 or 10% of the rateable value of the property (up to a maximum of £50,000).
If in breach for more than 3 months – a financial penalty not exceeding whichever is the greater of £10,000 and 20% of the rateable value of the property (up to a maximum of £150,000).
If a landlord has registered false or misleading information on the Exemptions Register - a financial penalty not exceeding £5,000 and a publication penalty.
- Publication penalty – a publication on the Exemptions Register detailing the breach, the address of the property and the amount of any financial penalty imposed.
Whilst landlords should use the lead in period before April 2018 to review their property portfolios for F and G rated EPCs, they should also bear in mind that properties which do not currently have an EPC may be required to in the future, for instance if the tenant should change. Furthermore, EPCs are valid for 10 years and April 2018 will mark 10 years since they were introduced for commercial properties. A number of EPCs will therefore be approaching expiry around, or soon after, the date the Regulations come into force. It is believed that, due to changes in building regulations in the meantime, some properties which currently have an E rating could be at risk of being downgraded upon review and consequently of falling foul of the Regulations.
The Secretary of State is required to review the operation and effect of the Regulations at least every five years. Therefore, whilst only properties below an E rating will be caught by the Regulations initially, it is likely that the threshold will be changed in the future so as to increase the energy efficiency of more properties. Landlords should bear this in mind when carrying out works as properties which are brought up to, say, an E rating to comply with the Regulations, may then require further work if the threshold is subsequently changed.
Although it will not be a tenant’s responsibility to comply with the Regulations and the validity of leases will not be affected by a breach of the Regulations, tenants and prospective tenants of properties with a low EPC rating will need to be aware of any works the landlord might be intending to carry out in order to comply with its obligations and particularly whether the costs to be incurred can be passed on to tenants, such as through the service charge. Service charge clauses should therefore be reviewed carefully upon the grant of a new lease as landlords will no doubt want to ensure that any costs are passed on.