The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 (SI2007/991) introduced a new regime implementing the Energy Performance of Buildings Directive in England and Wales. Similar, but separate regulations apply in Scotland. This article is concerned with the application of the England and Wales Regulations, and the views expressed relate specifically to that jurisdiction.
Whenever a building is sold or rented out, a prospective seller/landlord must make an energy performance certificate available free of charge to any prospective buyer/tenant in relation to its building. The Regulations are supported by Guidance produced by the Department for Communities and Local Government. From 4 January 2009 the obligation to provide an EPC has applied to virtually all commercial property with only limited exceptions.
An EPC rates the energy performance of the building and is accompanied by a report recommending any actions that could be taken to improve the rating. EPCs are valid for up to 10 years or until a newer EPC is produced.
Lack of clarity
Since they were introduced, the Regulations have been amended no less than four times. This has led to confusion as to what has actually been required of property owners. Insufficient time has passed to allow market practice on their application to commercial transactions to be established and a lack of clarity in the drafting of the Regulations means that a level of uncertainty remains. (The same can be said of the Scottish Regulations). Unhelpfully, the extensive Guidance is itself not clearly drafted and many questions remain at large. A number of these issues are relevant to business asset sales (whether or not including a portfolio of properties and whether or not conducted by an insolvency practitioner).
When does the duty arise?
If the Regulations apply to the particular transaction, the EPC must be provided to the buyer/tenant at the earliest opportunity and certainly no later than the earliest of the following times:
- In the case of a person who requests information about the building, the time at which the relevant person first makes available any information in writing about the building to the person.
- In the case of a person who makes a request to view a building, the time at which the person views the building.
- Before entering into a contract for the sale/assignment/lease or if there is no contract before the transfer/assignment/lease itself.
Is there an obligation to provide EPCs in business asset sales?
The duty to provide an EPC is imposed on the "relevant person". In the context of these sales the "relevant person" must be a "seller" or a "landlord" (other persons comprised in that definition being irrelevant for these purposes). According to the Guidance, a seller includes an assignor of a lease, although there is no mention of assignors in the Regulations.
Often the assignment of leasehold interests to the purchaser of a business will be for no monetary consideration with no value being attributed to the leasehold properties in the business sale agreement.
The question which arises in the context of business sales is whether there is a duty to provide an EPC for the transferring property or properties. The obligation to provide an EPC may impact on the timing of the transaction and cause delays, and is clearly an important consideration in anticipation of completion of any business sale.
Requirement to provide an EPC on "sale" or "rent"
There is no definition of "sold or rented out" in the Regulations. Neither are the terms "sale" or "seller" defined in the Regulations or in the European Directive. In the absence of any statutory definition, the terms have, however, previously been the subject of a number of judicial decisions.
The case-law is very clear: a sale means an exchange of property for money. It does not include an exchange of property for other valuable consideration, such as the assumption of lease covenants. Money is not the same as money's worth and therefore an agreement to transfer leasehold land in return for the buyer agreeing to be bound by the leasehold covenants has been held not to be a "sale" (Robshaw Brothers Limited v Mayer 1957 [Ch] 125).
This decision remains good law and has been followed in a series of cases, culminating in the House of Lords decision in Inland Revenue Commissioners v Littlewoods Mail Order Stores Ltd 1963 [AC] 135. In this case, the court confirmed that to constitute a sale there must be a transfer of property for a price in money. The court was not prepared to extend the meaning of the word "sale" so as to include a transaction in which any consideration is given that is capable of valuation. Accordingly, where the consideration being provided is the assumption by an assignee of the tenant covenants of the lease, there is no "sale" and there is no "relevant person" on whom a duty to provide an EPC can be imposed. The Regulations simply do not apply.
The Guidance tentatively suggests that some "not for value transactions" fall outside the Regulations. Further support for the contention that a monetary payment is required before there can be a "sale" can be found in the Regulations themselves: the statutory duty does not arise if the relevant person believes, on reasonable grounds, that the prospective buyer is "unlikely to have sufficient means to buy … the building."
Enforcement and penalties
Local authorities (through trading standards officers) are responsible for enforcing the statutory duty. They can act on their own initiative or upon any complaint by a third party. If the seller fails to provide a copy of an EPC within 7 days of a request by a trading standards officer then the seller will be liable to a penalty charge.
In most cases this would be calculated as being 12.5% of the rateable value of the building, subject to a minimum of £500 and a maximum of £5,000. Failure to comply with the Regulations is a civil offence and does not attract criminal liability.
Within the period identified in the notice the relevant person may request the enforcement authority to review whether it was appropriate to issue the notice in the first place and if the outcome of the review is not satisfactory the relevant person may appeal to the county court within a period of 28 days from the date the outcome of the review is communicated to him. One of the grounds for appeal is that the recipient of the penalty charge notice did not commit the breach of duty specified in it.
Cost of an EPC
The cost of the EPC is borne by the seller and in the context of a business sale affecting a portfolio of properties the obligation to provide an EPC for each property could amount to a substantial sum. The cost will depend on the size, type and location of the property. An accredited Energy Performance Assessor is required to inspect the property and, ideally, building plans should be provided in advance of a site visit.
The Final Regulatory Impact Assessment in respect of the Regulations indicates that, in the Government's view, typical costs would range from £260 for a small retail unit through to £480 for a small commercial building, to £1,790 for a large commercial building. Anecdotal evidence would suggest that these figures are somewhat on the low side.
The obligation is on the seller to provide the EPC "free of charge". Therefore given this explicit wording, it is perhaps unlikely that a prospective buyer would accept an obligation to pay for an EPC. It is therefore clearly in the seller's interests to be aware of the ambiguities in the Regulations and to take the position that the duty to provide an EPC does not arise.
The buyer's perspective
Although no sanctions fall directly on a buyer or tenant who is entitled to, but does not, receive an EPC, one will be needed on any subsequent sale, lease assignment or underletting of the whole or part of the building. Any prospective buyer or tenant therefore has a vested interest in ensuring that one is obtained and handed over as part of the transaction. A seller may therefore be faced with a difficult buyer, insisting that EPCs should be provided. In such cases it may come down to a matter of negotiation. However, it is our view that there is simply no statutory obligation to provide an EPC if the properties are transferring for no monetary consideration.
Licences to occupy
Often in the sale of the business and assets of a company the proposed buyer requires a right to occupy the trading premises on a short term basis so as to be able immediately to take over the business and continue to trade. Typically this is achieved by a tenancy at will or licence to occupy, while the buyer negotiates with the landlord for an assignment of the company’s lease of the premises. The grant of a short-term contractual licence is considered unlikely to constitute the seller company as a "landlord". In our view, the obligation to provide an EPC is not triggered by the mere grant of a contractual licence to occupy.
If, however, under the terms of the sale agreement the company’s interest in the premises is being sold to the buyer for monetary consideration an EPC will need to be provided as part of the assignment process.
There is no consensus of opinion about whether an assignment of a lease for no monetary consideration (but in which the assignee merely gives a covenant to observe and perform the tenant covenants of the lease) triggers the duty under the Regulations to provide an EPC. The Guidance does shed some light on how the regime is intended to operate in practice. Despite this and continued dialogue with industry stakeholders, confusion and uncertainty remain.
The circumstances in which a statutory duty arises should be clear and certain. In the absence of clear legislative guidance, case-law has to be relied upon. Until Parliament or the Courts clarify the meaning of the words "sale" and "seller" in the context of the Regulations our view is there is no duty to provide an EPC where a property is transferring for no monetary consideration.
Leaving aside the difficulties with the construction of the Regulations, sellers should bear in mind that where the Regulations do apply, the obligation to provide an EPC arises very early in the course of the transaction. Failure to provide an EPC to the proposed buyer, tenant or assignee may result in a fine of up to £5,000. It is recommended that specialist advice be obtained as soon as possible in relation to the application of the Regulations to any proposed sale, letting or assignment of any commercial premises that might be affected.