- Landlords will be unable to let properties which fall below a prescribed level of energy efficiency unless they make certain improvements
- Landlords of certain domestic premises will not be able to withhold consent unreasonably to a request by their tenants to carry out qualifying improvements which would increase the property's energy efficiency
- Access to the register of Energy Performance Certificates may be widened
- The "Green Deal" will enable energy efficiency improvements to be made to properties at no up-front cost to the energy consumer, with repayments made via energy bills
The Energy Act 2011 is a wide-ranging piece of legislation. Best known as the vehicle for implementing the government's flagship "Green Deal" policy, the Act also contains a number of other energy-related measures. A full review of the Act is outside the scope of this analysis, but the key points for those in the real estate industry are set out below.
Restriction on letting property which does not meet certain energy performance standards
This is the key provision in the Act for real estate owners and investors. Once it is in force, a landlord of a property which falls below a prescribed level of energy efficiency will not be able to let that property until the landlord has made certain energy efficiency improvements (again, to be prescribed).
The rule will apply to both residential and commercial properties, although there will be some exclusions (see below). The rule must be brought into force by 1 April 2018, but it is important to note that this is a long-stop date and it could apply earlier than this.
The level of energy efficiency will be demonstrated by the property's Energy Performance Certificate (EPC). The level at which the threshold will be set is not found in the Act itself, and will be set by regulations. However, a press release from the Department of Energy and Climate Change earlier this year suggested that this will be set at an "E" rating (i.e. a property with an EPC level of only F or G would not be able to be let until relevant improvements had been made).
The necessary improvements do not necessarily have to be financed by landlords up-front. They may be paid for through the Green Deal (see below), certain other schemes applicable to residential property such as the soon-to-be-introduced Energy Company Obligation, or in some other way to be provided for in the regulations.
The regulations distinguish between domestic and non-domestic properties, although the rules applying to each are broadly the same. Non-domestic properties are essentially properties which are not dwellings.
In relation to domestic properties, the following types of tenancies will be subject to the restriction on letting:
- Assured tenancies (including Assured Shorthold Tenancies, commonly known as ASTs)
- Regulated tenancies under the Rent Act 1977
- Any other tenancy which is specified for these purposes by the Secretary of State.
Various exemptions relating to social housing will apply, including where the property is low cost rental accommodation and the landlord is a private registered provider of social housing, and where property is owned under a shared ownership scheme.
More exclusions may be contained in the regulations which are to implement the new law.
The restriction relates to lettings, not sales. Until regulations are published it is not clear whether it would catch the grant of a long lease which, although technically a letting, is more akin to a sale. From the way the enabling legislation has been framed, it appears possible that the rule could also apply to existing leases as at the date it comes into force. It is not clear how this would work - would landlords have to carry out any required improvements before the legislation comes into force in order to avoid being in breach...? The necessary rights may not have been reserved in the lease and such a landlord may risk breaching its covenant for quiet enjoyment in favour of the tenant if it has to carry out works during the currency of an existing lease.
Landlords who are themselves tenants may also find that the works put them in breach of their own lease. In this regard it is to be noted that the Act provides that regulations may include exemptions where any necessary permissions or consents cannot be obtained. There is also the potential - subject to the regulations - for a possible exemption where there will be a likely negative impact on the value of a property of making the improvements.
This restriction on letting properties which do not come up to the right energy standard will be enforced by local authorities (probably through Trading Standards officers). Civil penalties may be imposed. These must not exceed £5,000 in respect of residential property but the Act does not stipulate a limit in relation to commercial properties (this is presumably left to regulations).
Although most of the detail is left to regulations, property investors can - and should - start preparing now. A first step would be to review an investment portfolio to assess which properties currently have EPCs (the requirement will only apply where an EPC exists, although the provision of an EPC is of course a requirement on most new lettings in any event). Energy performance ratings should then be examined, and properties with low ratings identified.
An EPC is accompanied by a recommendation report which sets out measures which would improve the energy performance of the building, and the impact that such measures would have on the building's rating. These could be a useful indicator of how buildings which may fall below the prescribed threshold could be brought up to standard. However, landlords may prefer to wait for the detail of the regulations to see what sorts of improvements will be prescribed before carrying out work.
Where new properties are acquired into a portfolio between now and the implementation date, investors should ensure that they receive a copy of the EPC and carefully review it. Where it shows that the property may not come up to the required standard without works being carried out, purchasers should consider whether this may affect the investment value of the acquisition.
Ability for tenants of domestic premises to request consent to make certain energy-efficient improvements
This part of the Act is again to be implemented through secondary legislation. It will apply to domestic properties which meet the criteria set out under "Restriction on letting property which does not meet certain energy performance standards" above. It will not apply to commercial properties.
Once the relevant regulations are in force, a landlord of a domestic property which is caught by the regulations will not be able to unreasonably refuse consent to a request by the tenant to make improvements which would improve the property's energy efficiency and which fall within categories to be set out in the regulations. Again, the Green Deal or another method of financing may be used to carry out the improvements.
The regulations must be brought into force before 1 April 2016, but could be implemented sooner. As with the restriction on letting properties outlined above, exemptions may be introduced to deal with situations where other permissions and consents to works would be required (e.g. from a superior landlord). Exemptions may also apply where there would be likely to be a negative impact on the value of a property as a result of making the improvements.
A tenant who believes that its landlord is unreasonably refusing consent to improvements may apply to court for a declaration to this effect. The powers of the court in such circumstances will be laid down in the regulations.
The green deal is a key policy of the coalition government. In essence, it will enable energy efficiency improvements to be made to properties using finance from accredited providers, thus removing the up-front cost to energy consumers of investing in such measures. It is capable of being taken up in relation to commercial, as well as residential, properties.
Under a green deal energy plan, energy efficiency improvements will be paid for in instalments. The types of improvements which are eligible for the green deal will be set out in secondary legislation, but may include measures for increasing the amount of energy generated at a property, as well as measures for reducing energy consumed at that property.
The payments in instalments will be made through the energy bills for the property, by the person who is for the time being liable to pay those bills. This is so that the burden of making the payments can therefore be passed from one owner to another when the property is transferred.
Indeed, a green deal plan must not include any provision by which a person is liable to make payments otherwise than in respect of the period for which they are the bill payer for that property. Payments under a plan are recoverable as a debt, and it will not be permissible for a charge to be taken over the property to secure them.
The green deal provider must prepare an estimate, in accordance with a method to be prescribed, of the savings which are likely to be made on the energy bills for the property if the improvements are carried out. The estimate must also show the period over which those savings are likely to be made. Regulations will lay down the required relationship between the cost of the improvements (including any finance costs) and the likely savings.
A similar requirement will need to be met as to the relationship between the period over which the payment instalments are proposed to be paid, and the period over which savings are likely to be made. The "golden rule" is always the same - that the expected savings must be equal to or greater than the cost of the work being done.
Green deal plans can be entered into by occupiers of properties, as well as property owners. However, where the person entering into the plan is not the bill payer (as may be the case for example in a multi-let office building), regulations are likely to provide that the bill payer's consent to the payments must be obtained. In addition, the person entering into the plan will have to confirm, as a condition of the plan, that any necessary permissions or consents (e.g. landlord's consent) have been obtained in respect of the improvements.
The making of the improvements themselves will be heavily regulated. An assessment will be carried out on a property to establish whether it is suitable for a green deal. Recommendations will then be made. The assessor, installer of the improvement and the green deal provider will all need to be authorised in accordance with a government scheme set up for the purpose. There will be a mechanism for ensuring the quality of any work carried out and for appropriate guarantees to be provided. The government's intention is that the property's EPC will be updated following completion of the works.
When a property which is the subject of a green deal is to be sold, prescribed information about the plan must be provided to prospective buyers. A similar requirement applies where a property is to be let, or a licence granted, and the prospective tenant or licensee is to be responsible for paying the energy bills for the property. The method of disclosure may be through the updated EPC (see above).
The extension to licences as well as leases is notable as it is in contrast with the energy performance regulations governing the provision of EPCs on lettings, which are commonly interpreted not to apply to licences. In addition, the sale contract (or, where it exists in writing, the lease or licence agreement) must include an acknowledgment by the buyer, tenant or licensee that the bill payer at the property is liable to make payments under the green deal plan, and that certain terms of that plan are binding on the bill payer. Similar requirements may be extended to other transactions affecting green deal properties, pursuant to regulations.
A summary of the scheme published by the Department for Energy and Climate Change suggests that the green deal will include provision for special circumstances such as substantial renovation of the property, change of use, demolition or compulsory purchase orders.
It will be apparent from the outline above that much of the detail of the green deal is to be set out in regulations. According to timings on the Department for Energy and Climate Change's website, a consultation on these regulations should be issued imminently. Industry guidance will be prepared in Spring 2012, with the first green deals appearing in Autumn 2012.
Register of EPCs, DECs and air-conditioning inspection reports
The Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007 provide for a register to be kept of all Energy Performance Certificates (EPCs) and Display Energy Certificates (DECs). This is to be extended to air-conditioning inspection reports from April 2012 (see our item on Energy Performance of Buildings).
The 2007 regulations provide that the keeper of the register may disclose any document or data from the register if authorised by the regulations. Documents may be disclosed where the person requesting the document has a reference number. It is also possible to find out (without a reference number) whether an EPC (or, from 6 April 2012, an air-conditioning inspection report) has been registered for a commercial building, and the date on which it was issued.
The government has for some time been aiming to increase access to the register. To that end, the Energy Act provides (at section 74) that further regulations may be made in relation to the disclosure of information held on the register. It is thought that this is to assist green deal providers in marketing their services to potential customers. Further details are awaited.