The Energy Efficient Regulations 2015 will come into force on 1 April 2018. They set out new minimum energy efficiency standards 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.
Energy Efficiency Standards – Exclusions & Exceptions
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:
- All cost-effective improvements, (classed as works that would pay for themselves through energy savings within 7 years), have already been undertaken or there are no such works that can be done.
- Third party consent cannot be obtained, for example, from the planning authority, lender, superior landlords or consent from the tenant under the lease to enter the property to carry out improvement works.
- An independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5%, or would damage the property.
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.
Enforcement & Penalties
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 with minimum energy efficiency standards 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.
Clauses in Commercial Leases
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:
- A right for the landlord to enter the premises to carry out energy efficiency improvement works, if the tenant (in its absolute discretion) consents. If the tenant doesn’t consent, the landlord can rely on the third party exemption, allowing them to continue to let the property.
- An obligation on the tenant to pay the costs of these energy efficiency improvement works (as it will be the tenant who benefits from the energy savings).
- A prohibition of alterations that would otherwise be permitted, if those alterations would adversely affect the environmental performance of the premises.
- Restrictions on the tenant preventing it from obtaining an EPC unless it must do so by law (e.g. by assignment or underletting). This is to avoid the possibility that the EPC which the landlord holds for particular premises is replaced by a later EPC with a rating below E.
- A rent review assumption that the premises may be lawfully let at the rent review date. When dealing with lease renewals, it may be best to settle for the provisions from the Model Commercial Lease, which are middle ground between landlord and tenant.
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.