The Energy Act 2011, which was given Royal Assent on 18 October 2011, is intended to improve energy efficiency in homes and businesses, in particular through the Private Rented Sector Regulations (PRSR). The Green Deal came into effect at the end of January 2013. Further regulations affecting the private rented sector will come into force between now and 2018.

In particular the Act provides for regulations to be effective from no later than April 2018 to restrict property owners from letting properties which are below a minimum energy efficiency rating by reference to the building’s Energy Performance Certificate (EPC). The current proposition is that the threshold will be an E rating, meaning landlords with buildings with an F or G rating (estimated to be 18% of rented non-residential buildings) will not be able to legally let them unless sufficient efforts have been made to reduce the rating to the lowest possible level. The market is likely to quickly factor in a discount for properties likely to need significant expenditure to bring them up to the required standard.

The Green Deal may provide some comfort to landlords. It allows private firms to lend finance to businesses and consumers to fund energy efficiency improvements to their properties, so that landlords bear no upfront cost for installing improvements. The lender will recoup payment through a charge on the energy bill of the property. The ‘Golden Rule’ is that the incentive only applies where the expected financial savings are equal to or greater than the costs attached to the energy bill.

In Practice:

  • Landlords are advised to review their portfolios now and consider what action they should take. At the very least, knowing the current EPC rating of buildings held or occupied is critical. Landlords should review potential options for improving the energy rating where necessary to ensure properties’ lettability in 2018 onwards or they may wish to consider disposing of poorly rated stock in favour of that with higher energy efficiency.
  • Other factors for landlords to consider are whether they have necessary access rights under their lease to carry out the works and the issue of recovery of costs of such works to the common part via service charges. Both landlords and tenants will have to consider service charge provisions in leases carefully in this respect.
  • Landlords should be aware that as from April 2016 they will not be able to refuse consent to a tenant’s request to make alterations for energy efficiency reasons. Landlord may wish to consider incorporating provisions in leases to the effect that a Green Deal plan cannot exceed the term of the lease. This would prevent the landlord being responsible for the charges during a void period and having to market the property again with a Green Deal charge.
  • Other issues for tenants include being aware that a low EPC rating could restrict their ability to sublet a property after 2018. In addition, if a tenant is carrying out the works, it should ensure they are recorded in a licence for alterations which provides that they are disregarded at rent review and that the tenant does not have to remove such works at the end of the lease term.
  • Landlords and tenants should consider seeking legal advice on the incorporation of “green” clauses into their leases which require better environmental management of a building.
  • It seems reasonable for lenders to question how significant expenditure on improvements will be funded during the loan term, whether that be through the Green Deal or otherwise. For example, lenders should be asking if the cost has been factored into the borrowers’ business plan. Conversely, those lenders who have considered the point may be faced with customers who do not appreciate the scope of the problem.
  • From 1 January 2015, it will be illegal to use any HCFCs to service refrigeration and air conditioning equipment, given the effect on the ozone layer including the commonly used R22 coolant. Aged air conditioning plant can be a major factor in driving EPC ratings into the lower F and G categories. Landlords may wish to upgrade the air conditioning plant in a building if it covers the common parts and lettable areas. This will affect the whole building, being for the long–term benefit of its occupiers, but savvy tenants of new leases are already attempting to remove any liability on their part to pay for upgrades to achieve improved energy performance. Contracting parties therefore need to consider the problem now, not in five years.

Courtesy of Thames Valley Business Magazine April 2013