The Energy Efficient Regulations 2015 will come into force on 1 April 2018. They set out a new minimum energy efficiency standard and require landlords of private rented property in England and Wales to achieve a performance rating of at least ‘E’ on their Energy Performance Certificate. The Regulations only apply to the letting of private property, not to sales, but have already begun to substantially affect the future of certain rental properties in England and Wales.
Under the new rules, a landlord will not be able to grant a new tenancy of a property that has an EPC rating below an ‘E’. Furthermore, from 1 April 2023, the Regulations will apply to all existing lettings, not just new tenancies. This means if you do not improve your ‘F’ or ‘G’ rated properties, you will be in breach of the Regulations if you allow existing leases to continue after 1 April 2023.
From 1 April 2018, landlords will not be able to grant new tenancies of residential privately rented properties that fall below the EPC rating of ‘E’. From 1 April 2020, landlords are prohibited from continuing to let their properties under existing tenancies if the property is rated below an ‘E’, so all residential tenancies will be caught by the Regulations by 1 April 2020.
There are certain exclusions and exceptions that allow a landlord to let a property with a low energy performance certificate.
The Regulations do not apply to short leases (defined as less than 6 months) or long leases (greater than 99 years).
Exceptions: a property with a low energy efficiency rating can still be let, provided one of these exceptions applies:
It should be noted that there is a high burden of compliance for these exemptions. A landlord must register the exemption on a central Private Rented Sector Exemption Register and each exemption will only last for a period of 5 years.
Where a local authority considers a landlord to be in breach of the Regulations, it may impose a fixed financial penalty. The maximum penalty for non-compliance in residential properties is £5,000.
Civil penalties for commercial properties will be based on the rateable value of the property. Where a landlord has been in breach for less than three months, fines must not exceed 10% of the rateable value, subject to a cap of £50,000. The level of fine will increase for breaches that exceed three months to 20% of the rateable value, subject to a maximum cap of £150,000.
The implications of the Minimum Energy Efficiency Standards should now be addressed in new leases. The following are now often included in new commercial leases:
Landlords need to review their property portfolios now, to identify properties with energy efficiency asset ratings of either ‘F’ or ‘G’. The marketability of these properties beyond 2018 will be severely impacted, so it is essential that a strategy for carrying out energy efficiency improvements is implemented, in order to ensure compliance with the Regulations.
In relation to existing leases, it is thought that the cost of ‘rating- up’ a property will generally rest with the landlord, as the costs of improvements fall outside most service charge regimes and are unlikely to fall within a fairly standard tenant’s obligation to comply with statute. In relation to dilapidations, large-scale replacement of mechanical and electrical equipment within a building, as a result of poor energy efficiency (rather than disrepair), will probably fall outside a typical tenant’s repairing obligation in the lease.
Landlords and tenants should address the implications of Minimum Energy Efficiency Standards by way of lease drafting or amendments now, in order to avoid confusion and arguments at the end of the term.
If you would like to discuss these new Regulations and/or property matters more widely, please contact our Residential and Commercial Property teams on 020 7631 4141 or email Julienne Coffey or Nick Potter.