As many readers will already be aware we are approaching the implementation of the prohibition on letting “F” and “G” rated properties in the private sector (subject to a few exemptions and exceptions). With just over one year to go until the 1 April 2018 date the Government has recently published guidance clarifying some aspects of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “Regulations”).

The guidance issued on 23 February 2017 (the “Guidance”) covers the implementation of the Regulations in relation to non-domestic private rental properties. To read our recent previous articles on the minimum energy efficiency standards (“MEES”) click here and here. To access the Guidance click here. Guidance for domestic properties is anticipated.

Implementation

The Regulations establish MEES for the private rented sector, implementation of which is staged to come into effect over a period of time:

  • From 1 April 2018: landlords of non-domestic private rental properties may not grant a tenancy to a new or existing tenant if the property has an EPC rating below a band “E”.
  • From 1 April 2020: landlords of private domestic property must no longer let a property which has an EPC rating below an “E”. This includes those properties which are already let but have an EPC below an “E”.
  • From 1 April 2023: landlords of non-domestic property must no longer let a property which has an EPC rating below an “E”. This includes those properties which are already let but have an EPC below an “E”.

The Guidance confirms that MEES will only apply to those properties which require an EPC by law and which are let under a tenancy. Where a multi-let building has multiple EPCs (for example for separate tenants of each floor) each EPC for a “property” subject to a separate tenancy will be caught by the Regulations separately.

As the Guidance emphasises, EPC calculations are regularly updated and as such properties that could currently hold an “E” rating may find their EPC band changing adversely in the future including due to changes in building standards. There are no currently planned changes to the SAP methodology for non-domestic properties which is used to calculate EPC ratings, however, updates are expected before 2023. In relation to domestic property the SAP methodology is due to be updated autumn 2017.

Exclusions and Exemptions

Properties let on a lease of less than 6 months or more than 99 years are excluded from the Regulations.

The exemptions available to landlords include:

  • The seven year payback test: where a measure is not cost effective within a seven year payback. Packages of measures may be cost effective within a seven year period, however, the Guidance has confirmed there is no requirement for landlords to consider packages in order to comply with the Regulations and rely on the exemption. The Guidance provides detailed information on how to calculate whether a landlord can rely on the seven year payback exemption as well as what evidence is required in order to rely on it. A landlord is expected to implement any energy efficiency improvement works that satisfy the seven year payback test regardless of financial position.
  • Third party consent: where despite “reasonable endeavours” necessary third party consents to carry out the energy efficiency improvements cannot be obtained. The Guidance indicates what evidence will be required by enforcement authorities in order for landlords to rely on this exemption in chapter 4. Note this exemption only applies for five years or if tenant consent is the issue until the current tenancy ends.
  • Property devaluation: where the measures proposed would reduce the value of the property by 5% or more. This exemption only applies for five years and upon the expiry of the five year period the landlord must try again to improve the property’s EPC rating before they re-register their exemption.
  • Recently becoming a landlord: in certain circumstances (including the grant of a lease due to a contractual obligation or the grant of an overriding lease under the Landlord and Tenant (Covenants) Act 1995), a six month temporary exemption applies to new landlords after which period they will be required to meet the requirements under the Regulations or register a valid exemption.

Exemptions from the prohibition on letting will not pass over to a new owner or landlord upon the sale or transfer of a property. Therefore, those clients purchasing a property or transferring a property intra-group which relies on an exemption will need to take this into consideration in relation to their transaction. They will need to either improve the property to the minimum standard or register an exemption if they intend to continue to let the property.

PRS Exemptions Register

Landlords will already be aware where they seek to rely on an exemption they will have to place details of the exemption and accompanying evidence on the PRS exemptions register (the “PRS Exemptions Register”). The Guidance clarifies that exemptions will be made on a self-certification basis with enforcement authorities monitoring and auditing the PRS Exemptions Register to ensure compliance. Landlords will be able to register their exemptions from 1 April 2017. If a landlord wishes to rely on an exemption, it will need to be registered before 1 April 2018.

Certain information on the PRS Exemptions Register will be publicly available from April 2018 including:

  • Addresses of properties with exemptions;
  • Names of landlords of exempt properties;
  • Details of the exemption relied on;
  • A copy of the valid EPCs for exempt properties; and
  • The dates on which the exemptions were registered.

Information placed on the PRS Exemptions Register must be current at the time of the registration of the exemption. In addition, any registration of an exemption must take place before the landlord can rely on the exemption to allow them to let, or continue to let, a property. Those landlords who instruct managing agents to manage their portfolios will be able to delegate registering exemptions to their managing agents. It is worth noting though that the landlord’s details must be submitted by the managing agent and not the managing agent’s own contact details.

In respect of multi-let buildings landlords will not be able to make bulk applications for exemptions and therefore will have to make separate applications for each “property” in the building.

Enforcement and Penalties

Local authorities will be enforcing the Regulations whose powers include:

  • Compliance Notices which will require landlords to provide information and/or to register information on the PRS Exemptions Register. The local authority will be able to issue a Compliance Notice on any current or previous landlord who has been in breach of the Regulations at any time in the past 12 months; and
  • Penalty Notices available for use against those landlords in breach of the Regulations. The local authority will be able to issue a Penalty Notice on any current or previous landlord who has breached the prohibition on letting of substandard property or not complied with a Compliance Notice. Penalty Notices can contain either:
    • A publication penalty which allows the local authority to publish details of any breach on the public section of the PRS Exemptions Register. Such publications will be accessible for at least 12 months; and/or
    • A financial penalty which can range between £5,000 and £150,000 depending upon the breach committed and the rateable value of the property.

The Regulations do not provide enforcement authorities with explicit powers to require non-compliant landlords to improve a property by a given date. Landlords may request the review of any Penalty Notice by the local authority and where it is upheld on review the landlord will have the option to appeal to the First-tier Tribunal. Penalty Notices are deemed to have no effect while an appeal is ongoing at the First-tier Tribunal. The Guidance states until a review or an appeal is lodged, or once a decision has been made regarding a review or an appeal, any non-payment of a financial penalty will allow the enforcement authority to bring proceedings against the landlord for the debt.

Next Steps

Whilst awareness of MEES has been growing, the time to start taking practical steps has begun. Landlords who have not started yet should consider the adequacy of existing lease provisions (and any changes they had decided on) to take account of the Regulations (even where the building is rated as an E or above presently). Terms in standard sale contracts may require review in order to minimise exposure to the Regulations following disposal of a property.

The PRS Exemptions Register will shortly open and those who wish to rely on an exemption should begin preparing evidence to carry out their self-certification. If they have not already so considered, landlords should review whether they need professional advice as to whether any relevant exemptions or exclusions apply. Where action is required, the impact of works, or the absence of works, to improve the EPC rating on asset value and rental income may need consideration.

Tenants should consider whether and how any proposed works are to be managed in order to avoid disruption and both parties will want to consider reputational risks arising from the letting of non-compliant properties.