UK: The Energy Act 2011 And The Introduction Of Minimum Energy Efficiency Standards

Last Updated: 3 December 2012
Article by Michelle Rowe

The Energy Act 2011 ("the Act") contains a number of energy-related measures, including the Government's flagship "Green Deal" and refers to the minimum energy efficiency standards a property should have. All of the provisions within the Act are likely to impact on landlords, property owners and occupiers.

The Green Deal

The Green Deal, launched in early October, affects both domestic and commercial properties. Conscious that the large up-front costs of many efficiency improvement works will deter property owners and occupiers from undertaking them, the Green Deal is the Government's funding initiative to encourage such works to be completed.

Under the Green Deal, property owners and occupiers will be able to receive financing for certain types of energy efficiency measures, which they will then repay over time through their energy bills. The expected financial savings resulting from installing such measures must be equal to, or greater than, the cost of repayment of the finance over the term of the Green Deal plan for finance to be available.

While, from this October, homes and businesses can be assessed for potential Green Deal work, access to finance for these measures will not be available for domestic premises until early 2013 and a date has not yet been set for the availability of finance for commercial premises. Therefore, although property owners will be able to commission assessments for such work, finance will not be available for the commercial parts of a property until a later unknown date.

Restriction on letting property

The Act also contains a provision which should be of great concern to both commercial and domestic property owners and occupiers and which has attracted a lot of criticism. Under the Act, it will become unlawful for properties to be let where they fall below a minimum standard of energy efficiency unless energy efficiency improvements available under the Green Deal have been implemented. It is yet to be determined when this part of the Act will be brought into force, however, it is proposed by 1 April 2018.

The level of a property's energy efficiency will continue to be demonstrated by an Energy Performance Certificate ("EPC") and the Department of Energy and Climate Change has suggested that the minimum standard of efficiency will be an 'E' rating. Therefore a property (whether domestic or otherwise) with a rating of either F or G will not be able to be let until improvements have been made. This regime will be enforced by the imposition of fines by trading standards officers.

It is difficult to assess the impact of the minimum efficiency standards while there is so much uncertainty surrounding the regime and how and when it will come into force. However, the consequences of its introduction are likely to include:

  • increased difficulties in selling or leasing properties with low ratings, or those which are deteriorating more rapidly;
  • property values falling where properties are less marketable;
  • a reduction in the open market value of these energy inefficient properties, having a negative effect on rent reviews; and
  • financing and lending options becoming restricted as lenders look to more sustainable options.

Data from Landmark (the UK's leading supplier of environmental and property risk assessment reports) shows that almost 25% of the EPCs registered in the last four years were at grades 'F' or 'G' highlighting the scale of properties likely to be affected. The trigger for the implementation of the new regulations is, as yet, unclear but the minimum standard could potentially apply on any letting, renewal or subletting of property. Sales and assignments do not appear to be caught by the provisions and some exemptions will apply for social housing and shared ownership properties.

A report published by GVA criticises the new regime and suggests that the Government might have encouraged efficiency improvements more effectively by offering Stamp Duty Land Tax incentives for improvements and good ratings, rather than by forcing improvements to be made. Regardless of the criticism, it appears that owners and occupiers need to prepare themselves.

Whilst there is still more than five years until the regime is likely to be introduced, it is advisable for property owners to commission an EPC of their rented or rentable properties now so as to understand the current rating and appreciate what options there are to boost this. If a rating of 'E' or above is obtained, the owner will be safe from the provisions of the Act until expiry of the EPC (10 years after it was produced). If a rating of 'F' or 'G' is obtained, recommended improvement measures can be costed, the feasibility of the Green Deal investigated, and work can be built into ongoing property maintenance plans over the next six years in preparation for the introduction of the minimum rating. If the cost of the works required to bring a property up to an 'E' rating is higher that the benefit of the letting, disposal should perhaps be considered.

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.

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Michelle Rowe
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