As many readers will be aware the Energy Act 2011 imposed a duty on the Secretary of State to improve the energy efficiency of privately rented properties in the domestic and non-domestic sectors in England and Wales.  The vehicle chosen, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “Regulations”) were made on 26 March 2015 and introduce minimum energy efficiency standards (MEES) for the private rented sector.  The Regulations are effective from 1 April 2016 (in relation to tenant’s energy efficiency improvements) and 1 October 2016 (in relation to MEES). Subject to certain exemptions and exceptions the Regulations will prohibit the letting of F and G rated properties in the domestic and non-domestic private rented sector in England and Wales requiring a minimum Energy Performance Certificate (‘EPC’) rating of E by 1 April 2018 (for all new leases) and by 1 April 2023 (for all existing leases). The new requirements are expected to have a significant impact on property investment, lending, asset valuation and practical management of energy requirements.

Context

The Government consulted on the MEES between 22 July 2014 and 2 September 2014 (to see our previous law now on the consultation click here). The Regulations are to be reviewed on a five yearly basis taking into account any lessons learnt (first review due in 2020). The Energy Efficiency (Domestic Private Rented Property) Order 2015 prescribes the tenancy types included as domestic private rented properties for the purposes of the Regulations.

Scope and application

For the purposes of the Regulations a property is not considered as non-domestic property if it is not required (nor is part of a building so required) to have an EPC. 

The Regulations will apply on a phased basis:-

From April 2016, residential private landlords will not be able to unreasonably refuse consent to a tenant’s request to make energy efficiency improvements where Green Deal finance or subsidies are available to pay for them.

From April 2018, unless certain exemptions and exclusions apply, private domestic and non-domestic landlords will need to ensure that their properties reach at least an E EPC rating, or have installed those improvements that could be funded using available Green Deal finance or subsidies available to pay for them, before granting a new lease or renewing or extending a lease where there is an EPC. 

From April 2020 these requirements will apply to all private rented properties, including existing lettings in the domestic sector.

From April 2023 these requirements will apply to all private rented properties, including existing lettings in the non-domestic sector. 

Any property covered by a lease of more than six months and with a leasehold of less than 99 years is in scope of the Regulations. If the same tenant has occupied the property for more than 12 months, then it is automatically covered. Subletting of units is also in scope as are lease renewals and extensions where there is an EPC.

Exclusions

There are 2 exclusions:- 

Tenancy Term: Properties on which a tenancy is let for 6 months or less and any property let on a tenancy for 99 years or more. 

EPC: Also excluded (and contrary to stakeholder feedback) are poorly performing non-domestic properties which do not hold an EPC. This is perceived as a potential loophole in the legislation which would merit further parliamentary scrutiny.

Temporary Exemptions

The exemptions identified below are valid for five years (subject to the sale of a property to a new owner or a receivership within that timeframe).  Upon expiry of an exemption, the landlord will need to either comply with MEES, or reapply for a new exemption. Exemptions will need to be lodged on the Exemptions Register.

Cost-effectiveness: Where the landlord is able to demonstrate that the measures are not cost-effective either within a seven year payback or under the Green Deal’s Golden Rule.

Third party consents: Where the landlord is able to demonstrate that despite “reasonable endeavours” (the exact meaning of this may have to be determined by the courts) the landlord cannot obtain necessary consents to install the required energy efficiency improvements, including from tenants, lenders and superior landlords. Non-statutory guidance will set out likely scenarios whereby a landlord may or may not be considered to have met its obligation.

Property devaluation: Where a relevant suitably qualified expert provides written advice that the measures will reduce a property’s value by 5% or more, or that wall insulation required to improve the property will damage the property.  In the course of the consultation stakeholders called for the value-based exemption to be more clearly defined to a limited number of cases that could be clearly demonstrated. 

Centralised Exemptions Register

Instead of requiring local authorities to certify exemptions an online Private Rented Sector (PRS) Exemptions Register is to be set up to enable the registration of exemptions for the non-domestic sector. Upon transfer to a new building owner, the Register will additionally denote that the new owner will have 6 months in which either to upgrade the building or to apply for a valid exemption. Thus upon any transfers of commercial property the new owners will have to reapply for existing exemptions to ensure that registration is effected in their name. Also, DECC will be able to use this information to assist local authorities in targeting their enforcement activity.

Grace periods

Where a tenancy is granted under statute the landlord will have six months from the date they become the landlord under that tenancy in order to comply with the Regulations.  Similarly, where a non-compliant property occupied by a tenant is sold, or is transferred to another lender in the case of receivership, the new landlord will have six months to improve the property or seek to demonstrate that an exemption applies.  In the case of lease renewals that are within the scope of the Landlord and Tenant Act 1954 landlords will be given an extension of six months from the date of the grant of tenancy before they are required to comply with the Regulations.

Penalties and Enforcement

Local authorities are to enforce the domestic provisions and local weights and measures authorities are to enforce in respect of non-domestic properties. They will be empowered to serve compliance notices on a landlord requesting further information they consider necessary to confirm compliance.  If this is not provided, or is provided and is not sufficient to prove compliance, the local authority may issue a penalty notice. If the landlord believes the penalty notice is incorrect, the landlord may proceed to appeal.

There will be four offences punishable by civil penalties for non-domestic properties:

  1. Providing false or misleading information to the PRS Exemptions register - £5000 and publication of non-compliance
  2. Failure to comply with a compliance notice from a local authority - £5000 and publication of non-compliance
  3. Renting out a non-compliant property for less than 3 months - 10 per cent of rateable value but with a minimum penalty of £5000 or a maximum of £50,000 and publication of non-compliance
  4. Renting out a non-compliant property for 3 months or more: 20 per cent of rateable value but with a minimum penalty of £10,000 and a maximum penalty of £150,000 and publication of non-compliance

Next steps and implications

Guidance on compliance with the Regulations is expected. The early notification of the Regulations was intended by Government to give the property sector a head start in considering the consequences of the changes and planning appropriately. Both landlords and tenants may wish to take the opportunity to review existing or proposed leases to ensure that the impact of MEES are covered. For example, provisions regarding alterations will need to ensure the tenant is not permitted to carry out alterations which would adversely affect the energy rating of the demise. Whereas rent review provisions will need to deal with the assumption that the premises can be lawfully let. Those holding assets on behalf of others will need to consider the energy efficiency status of properties within an investment portfolio and the implications of the Regulations so as to ensure the appropriate management of investors’ expectations.  

Information

To access the Regulations click here.