On 23 February 2017 the Department for Business Energy Industrial Strategy published its guidance for landlords and enforcement authorities on the minimum level of energy efficiency required to let non-domestic property. These are the "user notes" to the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. The guidance is not legally binding, nor does it comprehensively deal with how the Government will enforce the regulations from 1 April 2018. Even so, it does provide some further food for thought, as much for its exclusions as its content.

There is undeniably a political will to improve, and be seen to be improving, the energy efficiency of our property stock in England and Wales. According to government statistics, nearly one in five properties in the non-domestic private rented sector falls below the "E" EPC rating. Energy used to heat and power those buildings accounts for 12% of the UK's CO2 emissions.

Barring any radical political statements coming out of the Budget or the Queen's Speech in May, the regulations will affect the Real Estate sector from 1 April 2018 (and arguably they've already begun to do so). Even with the publication of the regulations and the guidance, it remains to be seen not so much whether the regulations will have the teeth that the Government envisaged, but whether those teeth will bite.

Exemptions and Exceptions 

The guidance is helpful in that it sets out more detail on the exemptions and exceptions that may be available to a landlord. Landlords can begin to consider these exemptions now and, to the extent they want to benefit from them, will need to log them on the PRS Exemptions Register before granting new leases after 1 April 2018. The register will apparently open from 1 April 2017 to log exemption information.

In particular, the guidance clarifies when the "consent" exemption will apply. There may be cases where a landlord cannot carry out works because they don't have tenant consent (or consent from a bank or superior landlord). This could be where there is no obvious incentive for the tenant to allow access and suffer disruption (we expect that this will initially be fairly common). The guidance suggests that in this scenario an exemption, once in place, will apply until that tenant assigns or until the end of its tenancy – this could technically exceed the five year maximum limit for other exemptions. This is common sense.

However, common sense does not prevail where an investor buys an asset including units that fall below the minimum required standards. If a consent-related exemption is in place, the new landlord will have to go through the same process as its predecessor in order to register the "no consent" exemption. This is because all exemptions are treated as personal to each landlord but this process will incur needless cost and time.

We have included below a ready reference table (extracted from the guidance) setting out the information that will be required in order to fulfil each of the relevant exemptions.

Exemptions register information requirements

Information required for all exemptions:

  • the address of the relevant rental property
  • which exemption to the regulations the landlord is registering
  • a copy of a valid Energy Performance Certificate for the property.

Additional information and evidence related to specific exemption

Registering a wall insulation exemption under regulation 28(2):

  • a copy of the written opinion of a relevant expert stating that the property cannot be improved to an EPC E rating because a recommended wall insulation measure would have a negative impact on the property (or the building of which it is a part).

Registering an exemption under the regulation 29(1)(a) exception - where all relevant improvements have been made and the property remains below an E:

  • details of any energy efficiency improvement recommended for the property in a relevant recommendation report, including an EPC report, a report prepared by a surveyor, or a Green Deal report
  • details, including date of installation, of all recommended energy efficiency improvements which have been made at the property in compliance with the regulations.

Registering an exemption under the regulation 29(1)(b) exception – where the property is below an E and there are no improvements which can be made:

  • a copy of the relevant report to demonstrate this (if separate to the relevant EPC).

Registering an exemption under the regulation 28(3) exception - where a measure in a valid recommendations report is not a “relevant energy efficiency improvement” because it does not meet the seven year payback rule:

  • copies of three quotes for the cost of purchasing and installing the measure from qualified installers, and confirmation that the landlord (or where the landlord is not a company under S1 of the Companies Act 2006, confirmation that a director) (or in any other case, confirmation that a person exercising management control in relation to the landlord) is satisfied that it does not meet the seven year payback rule, including copies of the calculations made to demonstrate this.

Registering a consent exemption under regulation 31(1):

  • a copy of any correspondence and/or relevant documentation demonstrating that consent for a relevant energy efficiency measure was required and sought, and that this consent was refused, or was granted subject to a condition that the landlord was not reasonably able to comply with
  • Please note: where the party who withheld consent was a tenant, the exemption will only remain valid until that tenant’s tenancy ends. When that tenant leaves the property the landlord will need to try again to improve the EPC rating of the property, or register another exemption, if applicable.

Registering a devaluation exemption under regulation 32(1):

  • a copy of the report prepared by an independent RICS surveyor that provides evidence that the installation of a relevant measures would devalue the property by more than 5%.

Registering an exemption upon recently becoming a landlord (regulation 33(1) or (3)):

  • the date on which they became the landlord for the property
  • the circumstances under which they became the landlord (circumstances are set out in section 3.1.3 in the guidance)
  • Please note: Where a person wishes to register an exemption upon recently becoming a landlord, the exemption will last for a period of six months.

Continuing to let properties after 1 April 2023

Unfortunately, the guidance does not tackle the challenge that awaits landlords of sub-standard properties whose tenants are mid-term on 1 April 2023. There is no provision within the guidance, nor suggestion that it will be forthcoming, to allow an implied right for a landlord in this scenario to go into premises, arguably interrupting a tenant's quiet enjoyment and to carry out improvement works. Nor does the guidance touch on the debate on which party should pay for those works and/or compensation for the interruption to the tenant's occupation.

There is some limited comfort for landlords in that the guidance suggests that where an EPC expires between 1 April 2018 and 1 April 2023 there will be no automatic obligation for the landlord to requisition a new EPC. The property will at that point fall outside these regulations until that new EPC requirement is again triggered; for instance on the grant of a new lease. This may be a temporary saving for a small number of leases where the term falls within that period.

Enforcement of the regulations 

The penalties for breach of the regulations are sizeable. Less than three months of breach could amount to a £50,000 fine and more than three months a £150,000 fine.

Perhaps the most eagerly awaited point of clarification since the regulations were first mooted has been what incentive there will be for the enforcers to enforce. Notwithstanding the level of the penalties, there is little incentive for a local weights and measures authority (aka the local council) to use its limited resource to pursue those property owners who may be in breach of the regulations if the penalties go to central government. In other words, only if councils stand to gain directly from the penalties that they collect are they likely to divert resource to MEES enforcement.

Nothing in the guidance helps clarify this point.

It will be interesting to see the level of take up of the PRS Exemption Register. If landlords want to rely on an exemption they will need to register that exemption. By doing so they will be highlighting to the enforcers that they fall within the ambit of the regulations. As such, they could be presenting themselves as easy targets. Those who choose not to register but remain in (silent) breach will present a more challenging group to pursue. It will require additional resource (but perhaps not a huge amount, given the value of the penalties to be secured) to research the online EPC register and compare with the rates register/the Valuation Office's information on new lettings.