On 5 February 2015, the government published its response to the consultation on minimum energy efficiency standards for domestic and non-domestic buildings, a day after laying draft Regulations before parliament. Christopher Norton and Simon Keen consider the practical implications of the government’s response and the new draft Regulations.
The government’s proposals are largely unchanged from the consultation and will significantly constrain the way in which owners and occupiers of commercial properties deal with their premises.
We do not yet know when the draft Regulations will be approved and come into law.
The government intends to make it unlawful to lease premises in England and Wales that have an EPC rating of less than E. The new law will be relevant to all landlords, including tenants who have sublet premises. The Regulations will be brought into force in two phases:
- From April 2018 landlords will need to ensure that properties are at least an E EPC rating before the grant of new leases (to new or existing tenants, so including lease renewals).
- From April 2023 this will extend to all premises, including those where a lease is already in place and a tenant is already in occupation.
In each case the government intends to limit the scope of the Regulations to premises for which an EPC is required.
The government intends to allow the following exclusions and exemptions from the new law:
- the grant of a lease for a term of more than 99 years.
- the grant of a lease for a term of less than 6 months (but, to prevent abuse, the exclusion will not apply where at the time the lease is granted the tenant has been in occupation for a continuous period of more than 12 months).
- where the landlord can demonstrate that the energy efficiency measures are not cost-effective (either within a seven year payback period or where the repayment costs for improvements, including interest charges, will exceed the expected energy bill savings in the first year).
- where consents to install energy efficiency measures (e.g. from tenants, lenders or superior landlords) cannot be obtained by the landlord, after using reasonable efforts to do so.
- where a suitably qualified expert provides written advice that the energy efficiency measures will reduce a property’s value by 5% or more, or that wall insulation required to improve the property will damage the property.
The exemptions will only last for five years, after which the landlord must re-evaluate the property to see if it can carry out necessary works, or evidence a further exemption if not. This will impose a compliance burden on landlords, as it means carrying out further energy efficiency assessments, re-applying for all necessary consents for works that meet the economic tests, and keeping evidence of the outcomes. The government proposes to establish an online “PRS Exemptions Register”, which DECC will run, to act as a centralised database for exemptions. Landlords who consider that they are exempt will be required to notify their exemption on the Register and lodge supporting evidence.
Whilst the Regulations will not apply until April 2018, landlords should plan for compliance now and consider what works are required to bring properties up to an EPC E level and whether such costs are recoverable. Similarly, investors should be aware of the potential effect on value of properties having an EPC rating of F or G in the light of the proposed new law.