The UK has a statutory duty under the Climate Change Act 2008 to reduce greenhouse gas emissions by at least 80% (from the 1990 baseline) by 2050. The Carbon Plan, published by the Department of Energy and Climate Change (“DECC”) in 2011, stipulates that in order to meet this target emissions from all buildings must be “close to zero” by 2050, meaning that by then all UK buildings will likely be required to have an EPC rating of close to current “A” standards.
A significant reduction in energy demand is seen as a fundamental factor in achieving this target, with section 49 of the Energy Act 2011 obliging DECC to implement Minimum Energy Efficiency Standard Regulations (“Regulations”) by no later than 1 April 2018. The intention being to galvanise positive action in improving energy efficiency in the least efficient non-domestic letting properties thereby reducing wastage and overall demand.
On 22 July 2014 DECC published a consultation on the implementation of the Regulations (“Consultation”) with the most significant proposal being a prohibition on the letting (not the sale) of property with an EPC rating of “F” or “G”. The Consultation evidenced that 18% of commercial rental premises fall below this standard and unless improvements are made, the new regime would therefore render a substantial portion of the existing commercial rental portfolio unmarketable unless the Regulations either do not apply or a landlord can demonstrate that it benefits from an exemption.
The Consultation highlights a number of limitations and exemptions as to the scope of the proposed Regulations, including:
- an exemption allowing landlords to let premises with an “F” or “G” rating insofar as they are undertaking all necessary improvements that are possible without the repayment of those improvements exceeding expected energy bill savings (the “Golden Rule”). This allows landlords to comply with the Regulations so far as is possible, without incurring upfront cost; and
- an exemption where consent is withheld in respect of improvement works that require third-party consent and the landlord has used its “best efforts” to obtain that consent and failed.
DECC proposed that the above two exemptions would last for five years, or until consent is granted, whereby the standard should be met or a landlord must again show an exemption applies.
- an exemption where the building being let is outside the scope of having to obtain an EPC, including those outside of the scope of the Energy Performance of Buildings (England and Wales) Regulations 2012;
- as an extension to the above, lease renewals/extensions do not require an EPC and would, strictly speaking, be excluded. However the Consultation specifies that the application of the Regulations in such scenarios would “make sense” so this limitation is likely to be removed by the final legislation; and
- application only to lettings for a term exceeding six months and less than 99 years. Such exemption ceases to apply where the same lease is granted to a tenant more than twice.
It appears likely that the Regulations will come into force as follows:
- the Regulations will apply to all new lettings from and including 1 April 2018; and
- the Regulations will apply in respect of existing lettings from and including 1 April 2023.
This means that any lettings that commence on or after 1 April 2018 must comply with the final legislation. It also means that any lettings that commenced prior to 1 April 2018 and have a term that extends beyond 1 April 2023 will become liable to enforcement action under the in-force legislation after that date if they have an EPC rating of “F” or “G”.
The Regulations will be enforced by Trading Standards Officers who will have discretion as to the imposition of civil penalties assessed by reference to a formula that ensures a degree of proportionality and reflects the benefit a landlord has received from a letting during the period of non- compliance with the Regulations. This looks likely to be based on a percentage of the rateable value of the property, with fixed alternatives where this formula cannot apply.
The consultation closed on 2 September 2014 and the feedback is being considered. Whilst the Regulations as discussed above are of course subject to change, it is important that potential landlords begin to consider the efficiency of their property portfolios with the above in mind to ensure that insofar as they are able they are prepared for 1 April 2018.