Under the Energy Act 2011 regulations outlining the minimum energy performance standards (MEPS) that leased properties will have to meet are due to be brought into force by April 2018. In fact the regulations are expected to be published early this year. Buildings within the lowest F or G energy efficiency bands will not be able to be let unless landlords take steps to improve the efficiency of the premises. The new law will apply to both commercial and residential properties. The Government has stated that currently 18% of non-domestic properties are within bands F or G, so clearly the change in the law will have an impact.
The Department of Energy and Climate Change released its consultation in July 2014, which reveals the likely form of the regulations will take. As explained above the minimum standard is that properties must have an energy rating of E or above to comply, and properties below this standard must install measures required to reach an E EPC rating. MEPS will probably be enforced by local Trading Standards Officers who will decide whether to impose a penalty and how high this should be. In order to comply with the new law landlords can make use of the Government’s Green Deal, which permits loans for energy saving measures.
The Government is proposing exceptions. It is likely that landlords will be permitted to let a property below the minimum E standard where all improvements have been undertaken that would meet the Golden Rule, taking into account any finance offered to cover the upfront cost of installation. The Golden Rule is that payments for improvements, including any interest charges, must be the same or less than the expected energy bill savings (in the first year). It is also expected that energy efficiency improvements will not be required if necessary third party consent cannot be obtained or if the improvements have a negative effect on the value of the property. However, the exemptions would expire after a reasonable period upon which the landlord would need to again attempt to meet the required E standard.
In terms of timescales three options are being debated. Firstly, a soft introduction – application of the regulations to new tenancies from 1 April 2018. Secondly, a hard introduction – application of the regulations to all leases from 1 April 2018. Thirdly, a phased introduction - a soft start with a hard “backstop”. Option three would apply to new leases to new tenants from 1 April 2018, but with a “backstop” at a later date, likely April 2023 applying the requirements to all leases. This is the Government’s preferred choice. It is possible that the regulations will apply to lease renewals and extensions, although it is proposed that leases under six months and over 99 years will be exempt.
Impact on lease drafting and action required
On the face of it the Energy Act 2011 does not actually appear to impose obligations on anyone including landlords to carry out energy efficiency works, rather it prohibits letting until such works are done. However, in reality for existing leases where the “backstop” applies works may need to be carried out mid-term.
Tenants may fear that they will have to undertake works due to the new regulations. To err on the side of caution a tenant could insist on a statement that it is not responsible for energy efficiency improvements in the repair and statutory obligations clauses or incorporate a schedule of condition into the lease.
Where tenants are considering assigning or subletting they may wish for more extensive rights to make alterations or improvements so that the premises are more attractive to assignees or subtenants. In fact the Energy Act 2011 states that domestic landlords are prohibited from unreasonably refusing consent for a tenant’s request to perform energy improvement works provided for under the Green Deal or another scheme.
Landlords will want to have sufficient access to F and G rated properties within the term of the lease. The rights of entry clause should be considered carefully as landlords may wish to carry out improvements, perhaps without the tenant’s consent. Where the property is E rated or above landlords will want to stop tenants carrying out works which could adversely affect energy efficiency. The standard alterations provision in a lease prohibits a landlord from unreasonably refusing consent to non-structural alterations. It is probable that a reduction in efficiency is a good reason to withhold consent.
There will be an impact on rent review provisions too. Since lettings of properties rated below E are not possible, tenants will argue that for hypothetical leases of such properties the rent would be nil. In an upwards only review the rent would therefore, not increase. Landlords may wish to draft leases so that any affect on rent attributable to the Energy Performance Certificate rating is to be disregarded for the purposes of rent review.
The service charge provisions in leases of part may be contentious in light of the change in legislation. Landlords may hope to put the cost of energy improvements on the tenant via the service charge – whether this will work will depend on if the service charge covers improvements in addition to repairs. Tenants will be advised to resist this.
Energy Performance Certificates should be reviewed, the cause of a low rating should be determined, and the necessary improvements should be ascertained. Where a lease is already in place and a problem arises parties should read the existing lease to see who is responsible for improvements. Whilst the precise impact of the new regulations is unknown, in circumstances where a property has low energy efficiency parties are advised to agree responsibility and take the above drafting considerations into account when preparing a new lease.