Background

The UK legislation on Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs) is derived from a European Directive, passed in 2002. EPCs and DECs only became mandatory in the UK in 2008.

Despite this, later the same year, the European Commission began consulting on ways to strengthen the law governing the energy performance of buildings. More details ofthe proposals as they evolved and were negotiated by member states emerged in March this year.

The result is Directive 2010/31/EU, which will repeal the 2002 Directive with effect from 1 February 2012.

So what's changing?

Display of energy certificates in commercial premises

Owners of properties that have a total useful floor area of more than 500m², and are frequently visited by the public, may soon find that they have to display an energy certificate at the relevant property.

The effect of the new Directive is that private bodies, as well as public authorities, now need to consider whether the display of an energy certificate is required. Affected properties include (but are not limited to) shops and shopping centres, supermarkets, restaurants, theatres, banks and hotels.

The Directive only requires the display of an energy certificate where one has already been issued. Unlike the UK legislation, the Directive does not distinguish between EPCs and DECs. However, the fact that a certificate only has to be displayed if it has already been obtained suggests that the requirement will be interpreted in domestic law to apply to EPCs, not DECs (since DECs are currently only held by public authorities). An EPC is most likely to exist (and therefore will have to be displayed) where the property has been newly constructed, or has been sold or let in the last few years.

However, the display of DECs in buildings which are occupied by private organisations, as well as those occupied by public authorities, should not be ruled out. The previous government consulted earlier this year on whether DECs should be extended to apply to commercial buildings. This would mean that, even if a building already has an EPC, a separate DEC would need to be commissioned to comply with this obligation.

DECs must be renewed annually and, as well as the asset rating given on an EPC, must also contain an operational rating, which reflects the actual energy consumption of the building from year to year. This will, of course, be determined by the energy behaviour of the occupiers within the building. Where a building is let, the landlord may have little control over how much energy its tenants consume.

Extension of DEC requirements for public authorities

The threshold for the display of a DEC by a public authority in a building which is frequently visited by the public will be lowered from 1,000m² to 500m². From 9 July 2015 the threshold will drop further to 250m².

Currently DECs have to be displayed by public authorities and "institutions providing public services to a large number of persons". This latter group is absent from the equivalent provision in the new Directive. This may be because premises which would have been caught by this definition will instead fall within the new rules in relation to properties which are frequently visited by the public (see'Display of energy certificates in commercial premises', above). However, this means that the question of whether it is an EPC or a DEC which has to be displayed is even more pertinent to these institutions.

The previous suggestion that a DEC must be displayed at all public buildings that meet the size threshold, regardless of whether or not they are frequently visited by the public, appears to have been dropped.

Recommendations to form part of EPC itself

At present an EPC is accompanied by a set of recommendations on how to improve the energy performance of the building. Under the new Directive, the recommendations must be included in the energy performance certificate itself, rather than simply accompany it.

This means that, where an EPC has to be displayed at a building, the recommendations will also be available for the public to see (whether or not they have subsequently been implemented). Again, it is not clear whether this will also apply to the advisory report which accompanies a DEC.

Implementation of recommendations

The Directive is clear that public authorities should set an example and take a leading role in the energy performance of buildings. For this reason, the Directive encourages the implementation by public authorities of the recommendations in an energy certificate within its life span (an EPC is valid for 10 years). Although the wording used is not entirely clear, it seems that implementation of recommendations by public authorities will be encouraged, but will not be mandatory. This will come as a relief to public bodies faced with stringent spending cuts.

However, since the Directive does not distinguish between EPCs and DECs, it is possible that this part of the Directive could be interpreted in national law to apply also to the advisory report that accompanies a DEC. Since DECs are only valid for a year, if implementation is required, then there would only be a short time to make the necessary improvements.

There is no suggestion at this stage that implementation of recommendations would be made mandatory for private bodies, although clearly the government would like to encourage more property owners to consider following some of the recommendations, in the interests of saving energy.

EPC must actually be handed over to buyer or tenant

The new Directive creates two distinct obligations in relation to energy performance certificates - first, that a certificate must be issued on a trigger event (construction, sale, letting), and secondly, that the certificate so issued must then be handed over to the prospective buyer or tenant.

The current UK regulations only require that the certificate be "made available" to the prospective tenant or buyer. Government guidance provides that this means that the buyer or tenant must be made aware that the EPC exists and the EPC must be ready to be shown on request. Under the new Directive, this will not be sufficient and a copy must actually be handed over. This is in accordance with best practice in any event.

EPC rating to be included in advertisements

The requirement that the certificate must actually be handed over is obviously designed to ensure that a prospective buyer or tenant has information about the energy performance of the building when choosing a property to buy or rent.

The new Directive further re-inforces this goal by introducing a requirement that the EPC rating must be included in advertisements when property is marketed for sale or let. (At the moment, the only requirement to include an EPC rating in marketing materials is in written sales particulars for a dwelling, and even then only if the particulars meet certain criteria.) Depending on how the implementing legislation is framed, this may mean that agents become liable for any failure to comply.

Lease renewals

The 2002 Directive provided that an EPC had to be provided when a building was rented out, but did not contain any exceptions for lease renewals to existing tenants. The UK government dealt with this in its guidance, which provides that lease renewals are exempt from the obligation to supply an EPC. The new Directive confirms that the obligation to provide an EPC on a letting only applies where the occupier is a "new tenant".

Single family houses can be assessed on a representative basis Currently an EPC for a flat, or a commercial unit, may be based on the assessment of another representative flat or unit in the same building. The new Directive also permits a similar approach to be taken for single-family houses, which may reduce the cost of producing EPCs for this type of property.

When will this happen?

Regulations implementing the new Directive into UK law have to be passed by 9 July 2012, although the deadline for bringing the changes into force is not until 9 January 2013. The previous government had, however, already announced its intention to accelerate some of the proposed changes, particularly those relating to the inclusion of EPC ratings in property advertisements.

It remains to be seen to what extent the coalition government will adopt the previous government's proposals to further extend the new Directive in an attempt to increase the rate at which carbon emissions from buildings are reduced.

What else?

Voluntary certification scheme

The Directive states that, in order to enhance the transparency of energy performance within the European Union's commercial property market, the European Commission is to establish a voluntary certification scheme for the energy performance of non-residential buildings which will be common across the EU. It is not clear how this will affect the system of energy certification which is currently in place in the UK.

Other changes?

There are hints in the Directive of other possible changes, but until details of the implementing legislation are announced by the UK government, it is difficult to know how these will be interpreted and applied in domestic law:

EPC of part of a building

At present an EPC for a commercial unit which forms part of a larger block can be based on a common certification of the whole building, but only where the building has a common heating system. The new Directive no longer contains the requirement that there be a common heating system.

This would appear to give building owners and occupiers more choice over how EPCs are prepared and could mean that it would no longer be necessary to commission a separate EPC of a unit in a building where there is already an EPC covering the building as a whole, regardless of the heating systems in place. However, it remains to be seen whether this change will be transposed into domestic law.

EPCs for public authorities

A DEC has two components: an asset rating, and an operational rating. Currently it is not necessary for a DEC to contain an asset rating if there is no EPC in existence for the building.

It is not clear whether, under the new Directive, an EPC will have to be issued for any building over 500m² occupied by a public authority and frequently visited by the public, even when a "trigger" such as a sale or letting has not occurred. The uncertainty arises as a result of a change in the way the new Directive is worded, and the fact that the UK government has created two different kinds of certificates. If this is correct, then it could mean additional expense for public bodies in commissioning EPCs for their buildings, at a time of large spending cuts.

Predicted energy assessments

The current UK legislation on EPCs clearly states that an EPC does not have to be made available before the construction of a building has been completed. However, in relation to the residential property market, "predicted energy assessments" (PEAs) were introduced under the Home Information Pack (HIP) regime for a dwelling which was marketed prior to physical completion.

Following the suspension of HIPs, PEAs are no longer legally required, although developers may still need to submit energy information to the building control officer as part of compliance with building regulations.

The new Directive requires that an EPC be issued on a sale or letting of a building. As with its predecessor, this provision does not distinguish between buildings which are physically complete and those which are not. However, the new Directive provides that member states may require that, where a building is sold or rented out in advance of construction, the seller has to provide an assessment of its future energy performance. This is expressed to be "as a derogation" to the primary duty to provide an EPC on sale.

The effect would be to re-instate the PEA requirement for dwellings, and introduce a similar requirement for commercial buildings which are sold or let before they are physically complete. A full EPC would still need to be supplied to the buyer or tenant once the building had been constructed.

Comment

The recitals to the Directive provide that owners and tenants of commercial buildings should be encouraged to exchange information regarding actual energy consumption, in order to ensure that all the data is available to make informed decisions about necessary improvements. The advent of the CRC (Energy Efficiency Scheme) in the UK is likely to mean that such an exchange of information between landlords and tenants becomes more commonplace, at least where the landlord is a participant in the CRC scheme.

There is a statutory obligation for tenants to provide reasonable assistance to their landlords (which could include the provision of information) in order that the landlord can comply with its obligations under the CRC scheme. "Green leases" can also provide the legal foundations for the sharing of environmental information. More informal dialogue is also possible outside the scope of the lease through the establishment of building committees, incorporating a mix of landlord and tenant representatives.

Conclusion

The main impact of the new Directive is in the requirement for owners of buildings which are visited by the public to display energy certificates, and in the reduced threshold for the display of DECs by public authorities. Further detail on the implementation of the Directive in the UK is expected from the Department for Communities and Local Government later in the year.