UK: Minimum Energy Efficiency Standards - November 2015

Last Updated: 30 November 2015
Article by John Staheli and Rebecca Roffe

Summary and implications

Described as "game-changing" by the Government, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations) are now law.

Subject to certain exclusions and exemptions, from 1 April 2018 it will be unlawful for a landlord to let a property that falls within the scope of the Regulations and has an energy performance certificate (EPC) rating below an E. From 1 April 2023, this requirement will extend to existing leases. This article focuses on commercial property but the Regulations also apply to residential property.

Scope and exclusions

Properties that do not need an EPC under the EPC regulations, and those subject to leases granted for either six months or less (provided that the same tenant has not occupied the property for over 12 months), or 99 years or more, will fall outside the scope of the Regulations.

The minimum level of energy efficiency is an EPC rating of E. A property is defined as "sub-standard" if it falls below this level.

The basic requirement

From 1 April 2018, a landlord of sub-standard property must not let that property unless either:

  • it has made all the "relevant energy efficiency improvements" to the property; or
  • no such improvements can be made; or
  • an exemption applies.

From 1 April 2023, this requirement will extend to all leases, including those that currently exist on that date.

Relevant energy efficiency improvements

Relevant energy efficiency improvements are those which:

  • fall within prescribed classes;
  • have been recommended in a green deal report, an EPC recommendations report or a surveyor's report; and
  • can either be funded through the green deal or would achieve a simple payback of seven years or less.

The "simple payback" will be far from simple in practice, but in essence it means that the proposed measure will, over a period of seven years, achieve savings in energy bills equal to or greater than the cost of purchasing and installing the improvement, plus an amount representing the cost of money (in other words, interest foregone).

Exemptions

There are three major exemptions:

  • the landlord has carried out all relevant energy efficiency improvements to the property or no such improvements can be made;
  • the landlord is unable to obtain all necessary consents for the works despite reasonable efforts (or such consent is granted subject to unreasonable conditions); or
  • any improvements would devalue the property's market value by 5 per cent or more (in the opinion of an independent surveyor).

Necessary consents include the consent of a tenant, superior landlord or mortgagee as well as statutory consents such as planning permission.

However, these major exemptions only last for five years from the date when the landlord establishes that the exemption applies, after which the landlord will need to establish an exemption again. Furthermore, the landlord will be required to register its exemption on a centralised register.

There are also a number of short-term exemptions, intended to cover various scenarios in which the landlord has no choice about granting the lease (e.g., 1954 Act renewals or where a former tenant calls for an overriding lease under the 1995 Covenants Act), or where the landlord acquires the property subject to an existing lease. In such circumstances, the landlord's obligations do not apply until six months after the trigger event. The intention is to give the landlord a temporary window to assess what works are required and either to implement them or to register one of the major exemptions, such as the tenant's refusal of consent.

Enforcement

It is a small consolation that if a landlord lets or (after April 2023) continues to let a sub-standard property in breach of the Regulations, the lease will still be valid. However, a breach of the Regulations carries some hefty fines. A breach of up to three months could incur a £50,000 fine and a breach of three months or more could result in a maximum £150,000 fine, plus a publication penalty, in both cases leading to bad publicity. At least, however, there are no criminal sanctions. The Regulations will be policed by local trading standards departments.

Uncertainty

Many aspects of the Regulations (e.g., what would constitute "reasonable efforts" to obtain consent) remain unclear and the industry will have to await further guidance, of which there is no sign yet.

Action

However, even though various points of detail remain unresolved, the direction of travel is clear. Now is the time to start preparing:

  • If property owners and tenants have not done so already, they should audit their portfolios to ascertain which properties are (or may be at risk of becoming) sub-standard for the purposes of the Regulations.
  • Check how robust any existing EPC ratings are. It may be possible to upgrade them.
  • Use void periods and planned maintenance programmes to carry out relevant energy efficiency improvements.
  • Landlords and their lawyers will need to review standard forms of lease.
  • Buyers of investment properties should consider carefully whether they will be able to let, or continue to let, the target property without incurring substantial costs.
  • As the statutory deadlines approach, there is likely to be a tightening of the market for the manufacture and installation of energy efficiency improvements, and landlords who delay may suffer from supply constraints.

The future

The UK has committed to an 80 per cent reduction in carbon emissions by 2050. The Regulations form part of a sustained targeting of the built environment which has, in recent years, brought about EPCs, the CRC Energy Efficiency Scheme, the Energy Efficiency Opportunity Scheme, the District Heat Network Regulations and a continuous ratcheting-up of Part L of the Building Regulations. The minimum energy efficiency Regulations are set to be reviewed in 2020, but property owners and occupiers need to act now.

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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