UK: Buying An Energy Inefficient Property - What Are The Risks?

From 1 April 2018, it will be unlawful for landlords of properties with EPC ratings of below E to let those premises, unless an exemption applies.

Any exemption is personal so cannot be relied upon by a buyer. So what does a buyer of a sub-standard property need to do to ensure that it is not liable to a hefty fine? We have put together a collection of frequently asked questions, to assist you in navigating the legislation.

If I buy a commercial property that is let out to tenants and has an EPC rating of F or G, will I be in breach of The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015?

Under The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (commonly known as the MEES Regulations), it will be unlawful for a landlord to let a property with an EPC rating of below E (known as a sub-standard property) on or after 1 April 2018. If you buy the property now, and the leases are already in place, you will not be in breach on 1 April 2018.  However, if you were to grant any new leases on or after 1 April 2018, you would have to comply with the MEES Regulations. That means that either you would have to bring the property up to at least an E rating, or register an exemption.

The prohibition in the MEES Regulations is extended to existing leases of non-domestic properties from 1 April 2023 (1 April 2020 for domestic properties). Therefore, if any of the existing leases were still in place on 1 April 2023, and there was a valid EPC at that date, you would need to ensure that the property was brought up to an E rating or that an exemption applied. If, however, the EPC was no longer valid (because it was more than ten years' old), you would not be in breach. Once a new EPC was obtained (for example on a sale or the grant of a new lease), you would have a valid EPC and would need to comply with the MEES Regulations.

I am in the process of buying an F-rated property. The property is listed. Will the listed status mean that I will not have to do any works before granting leases and will be able to rely on an exemption?

You would not have to do any works if you granted the leases before 1 April 2018. However, you would be at risk that, if they were still in place on 1 April 2023, you would be in breach after that date.

What a landlord must do to comply with the MEES Regulations in relation to a listed property is not entirely clear. The MEES Regulations only apply to properties that are required to have an EPC. Under the Energy Performance of Buildings (England and Wales) Regulations 2012 (EPB Regulations), buildings officially protected as part of a designated environment or because of their special architectural or historical merit are not required to have an EPC "in so far as compliance with certain minimum energy efficiency requirements would unacceptably alter their character or appearance."

The MEES Regulations do not specify any specific energy efficiency requirements for listed properties. This omission is unhelpful. In order to see whether the property is at risk of being in breach of the MEES Regulations, you may need to commission an EPC. If you did this, and the EPC revealed that the property was a sub-standard property, how would you ascertain whether the works would unacceptably alter the character and appearance of the property?

The guidance issued by the Department for Business, Energy and Industrial Strategy attempts to address the point, but fails to do so to any useful end.

It states that "Examples of energy performance measures which may  alter character or appearance (or as a minimum are likely to require local authority planning permission to install on a listed building) include external sold wall insulation, replacement glazing, solar panels, or an external wall mounted air source heat pump. Where character or appearance would not  be altered by compliance with energy performance requirements, an EPC may be legally required."

Whilst it is clear that these measures may  alter character or appearance, no indication is given as to when this alteration will be considered unacceptable.

Each property will need to be examined on a case by case basis.

If I buy a property with a F or G rating after 1 April 2018, and the outgoing landlord registered an exemption prior to granting the post-1 April 2018 leases, do I need to take any action?

The guidance issued by the Department for Business, Energy & Industrial Strategy is clear – exemptions do not pass to future owners. The guidance states "If a let property with an F or G rating is sold or otherwise transferred with an exemption in place, the exemption will cease to be effective."

The MEES Regulations grant purchasers of sub-standard properties that are subject to tenancies a six month grace period before they will be in breach of the prohibition on continuing to let a sub-standard property (which comes in on 1 April 2023). However, it is less clear what happens if you buy a tenanted sub-standard property after 1 April 2018 but before 1 April 2023. Is any immediate action required on the part of the new landlord assuming that the tenancy was granted validly? There appears to be a gap in the legislation on this point. The common sense view is that a purchaser of a sub-standard tenanted property will not be in breach of the MEES Regulations until 1 April 2023. The purchaser would not have granted a new tenancy after 1 April 2018; it would merely be acquiring a property subject to tenancies that were lawfully granted after that date. However, the position is not clear. We are seeking clarification on the issue from the Department for Business, Energy & Industrial Strategy.

In relation to all exemptions, validity is dependent upon them being registered in the PRS Exemptions Register.

It is clear that the EPC must be examined; a cursory glance is not sufficient given the implications of letting a sub-standard property. Purchasers need to know what they are letting themselves in for, both in terms of the potential costs of bringing a sub-standard property up to the required standard and jumping through the legislative hoops to claim and register an exemption.

Contributor: Alexandra Holsgrove-Jones

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.