In a little over 9 months, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 come into force.

The effect of this legislation is that, from 1 April 2018, commercial landlords will no longer be able to grant leases of properties that have an EPC efficiency rating of less than E.

If landlords wish to continue letting properties that fall below this standard, they will first need to make relevant energy efficient improvements to raise the rating to at least an E or register the property for an exemption.

Landlords should act now to audit their portfolio to establish which properties fall below the minimum energy efficiency standard and take action.

What types of improvements need to be made if the property has a rating of F or G?

Relevant energy efficiency improvements could include replacement glazing, cavity wall insulation, thermostats, pipe insulation, new hot water systems, high performance external doors, hot water controls including timers and temperature controls, solar panels, etc. The EPC Recommendation Report which accompanies an EPC makes suggestions on how to improve the energy efficiency of a specific property.

What exemptions could apply if the property has a rating of F or G?

There are four broad categories of exemptions:

  1. The 7 Year Payback Rule – all relevant energy efficiency improvements have been carried out but the property still has a rating of less than E and it is considered that any further improvements will not pay for themselves through energy savings within 7 years. The value of savings on energy bills must be calculated using an approved methodology and relevant energy prices. Landlords are likely to need the services of a competent energy assessor to determine the savings and costs.
  2. Third party consent required – in some circumstances, certain energy efficiency improvements may need third party consent before they can be installed. For example, external wall insulation or solar panels may need planning permission, consent from lenders or superior landlords. Landlords must show that they have made a reasonable effort to seek consent before applying the exemption.
  3. Property devaluation – the landlord obtains a report from an independent surveyor advising that the installation of specify energy efficiency measures would reduce the market value of the property by more than 5%. This is a temporary exemption for five years.
  4. Recently becoming a landlord – a person has suddenly become a landlord and so it would be unreasonable to require them to comply with the regulations immediately. This is a temporary exemption for 6 months from the date they become the landlord.

Landlords must register the exemption on the Exemptions Register, which works on a self-certification basis. The database will be open to the public. If a landlord registers false or misleading information on the Exemptions Register, a financial penalty of up to £5,000 may be imposed.

Enforcement & penalties

The Regulations will be enforced by the Local Weights and Measures Authority, which has the discretion to decide on the amount of any penalty for non-compliance, up to the following maximums:

  1. Granting a lease for less than three months – a penalty of up to £5,000 or of up to 10% of the rateable value of the property (whichever is greater), subject to a maximum of £50,000.
  2. If a landlord has been in breach for three months or more at the time the penalty notice is served – a penalty of up to £10,000 or 20% of the rateable value of the property (whichever is greater), subject to a maximum of £150,000.

The enforcement authority may also “name and shame” by publishing details of the landlord’s breach on a publicly accessible part of the Exemptions Register for up to 12 months.

What should landlords be doing now?

Landlords should audit their portfolio and identify which properties have an energy efficiency rating of less than E.

In respect of those properties which fall below the threshold, landlords should consider:

  • making any relevant energy efficiency improvements, bearing in mind that it may take time to obtain consents;
  • begin to gather the relevant data which would enable them to self-certify an exemption;
  • review existing leases to ensure the landlord has the necessary rights of entry to the property in order to carry out energy improvement works;
  • consider the service charge provisions of any existing leases to establish if the costs of making the improvements can be passed on to any existing tenants.

The future

From 1 April 2023, the above regime will be extended to continuing tenancies, so landlords must not continue letting commercial properties (even if there has been no change of tenant since prior to 1 April 2018). It is important that if a landlord has any long-term refurbishment plans at a property, energy improvements are built into those plans. There is also no guarantee that the minimum energy efficiency standard will remain at band E in the long term!