The Department of Energy and Climate Change (DECC) has finally set out its proposals for the introduction of minimum energy efficiency standards for private rented properties. As anticipated it is proposed that from 1 April 2018 a property must have an EPC rating of at least an E before it can be let.
Although DECC estimates that F and G rated properties make up 18% of affected properties, it has been suggested that by 2018 this figure could actually be as high as 35%. For some landlords this may mean a significant proportion of their portfolio could soon become unmarketable.
DECC has launched two consultations, one for domestic and one for non-domestic properties. We have considered some of the key points in each consultation below.
Proposals for non-domestic properties
When will a property have to meet the new standard?
Under the draft Minimum Energy Efficiency Standard Regulations, all "eligible properties" in England and Wales will have to achieve an EPC rating of 'E' before being let to tenants. This will apply to all new leases from 1 April 2018. This is also intended to cover lease renewals.
All other affected properties will have to comply with the standard by 1 April 2023.
It is proposed that minimum standards should apply to all non-domestic properties that are occupied by tenants, regardless of the length of tenancy. The consultation is seeking views on whether leases that are less than six months or more than 99 years should be excluded from the regulations.
Which properties will be affected?
A non-domestic property will be covered by the minimum standard regulations if it is:
- Situated in England and Wales; and
- Required to obtain an Energy Performance Certificate (EPC) under the Energy Performance of Buildings (England and Wales) Regulations 2012; and
- Let under a tenancy; and
- Not a dwelling.
The regulations would not affect:
- Those properties not required to obtain an EPC when being let, such as properties awaiting demolition.
- Owner occupied commercial properties.
- Sales of commercial property.
Are there exemptions for eligible properties?
If a landlord has taken all energy efficiency improvement measures that would meet the "Golden Rule" he may be able to let the property, even if the property does not meet the minimum standard. Under the Golden Rule, the cost of repayments for improvements (including interest charges) must be the same or less than the expected energy bill savings.
A landlord may also be able to continue to let a below standard property where he is denied third party consent to carry out improvements (e.g. from a mortgagee, a local authority or where a tenant refuses to agree to improvements).
However, these exemptions would be time limited and subject to provision of evidence. DECC has proposed that after 5 years the landlord would need to either meet the minimum standard or demonstrate the exemption still applies. If the tenant which refused consent moves out before the end of the 5 year period the exemption will expire at the point they move out of the property.
The consultation is also seeking views on whether exemptions should apply where an independent property valuation shows that improvement works would reduce the value of a property.
Proposals for domestic properties
Although the proposals for non-domestic properties are largely the same as those for domestic properties there are some significant differences, particularly when it comes to implementation dates.
All eligible domestic properties will have to be improved to a minimum "E" EPC rating before being let to tenants on or after 1 April 2018.
All other eligible properties must comply with minimum energy efficiency standards by 1 April 2020, regardless of when the lease was granted.
In addition from 1 April 2016, tenants of domestic properties will have a right to request landlords to make energy efficiency improvements which cannot be unreasonably refused. This would apply regardless of whether the property has an EPC in place.
Enforcement and penalties
It is proposed that the regulations will be enforced by Trading Standards Officers within local authorities. Failure to comply will lead to a financial penalty.
For domestic properties, it is proposed that the amount of penalty will be the same as the rent value for the period of breach. The penalty for non-domestic properties is yet to be confirmed.
As energy efficiency improvements can be costly and not always quick to implement, landlords should review their property portfolios now to identify properties with energy ratings of F and G that will be unmarketable beyond 2018.
Landlords affected by these proposals may wish to respond to the consultations to ensure their views are considered. The deadline for submission of comments is 2 September 2014.
It is expected that the draft proposals will become law in early 2015.