UK: Do You Have The Energy For 2018?

Last Updated: 15 November 2016
Article by Simeon Fenn

4.1°C. That was, according to the Met Office, on average how much warmer last December was compared with the 1981-2010 long term average, making it the warmest December since 1910.

Such unusual weather is often cited as an example of climate change, which is now largely (if not universally) accepted as a significant challenge for us all. Which is why in 1997 the UK, along with the majority of developed nations, became a party to the Kyoto Protocol, an international agreement committing signatories to certain reductions in carbon emissions.

The political and legal wheels have turned slowly since then, but much like the capricious weather, those of us with an interest in commercial property could not miss the increasing burden of energy related regulations. In 2008 it was Energy Performance Certificates (EPCs). In 2010 came the Carbon Reduction Commitment. Eyes will now be turning to the latest regulations, imposing minimum energy efficiency standards (MEES). If you are not presently aware of MEES, I hope that this short article will bring you up to speed. If you are aware of MEES, but are not yet taking any action, I hope to persuade you to now do so.

In truth, the introduction of EPCs was not so bad. Landlords are simply required, before letting to a new tenant, to secure a relatively inexpensive assessment which rates their property in terms of energy efficiency, on a scale from A to G, with A being the most efficient. Although the certificates come with advice on steps which could be taken to improve energy efficiency, there is no requirement to carry them out. The certificates last for up to 10 years, so in many cases landlords will have secured them and not had to address the issue again.

The introduction of EPCs however, was really only the government's first step in a longer term plan. The second step, is to encourage energy efficiency to be improved (and hence emissions reduced), by making it unlawful for landlords to let properties with ratings towards the bottom of the scale. We now know that it is those properties with an EPC rating of F or G which will be subject to that restriction (around 18% of all current properties). But it's not quite that simple, and the goal posts may well move in the future.

As matters stand, the property industry will shortly be faced with a so-called 'soft start' to the new order. Specifically, by 1 April 2018, it will be unlawful, save in certain excepted cases, to grant a new lease of a property with an EPC rating below level E. Two important points follow from this.

First, if your property does not need an EPC (for example, if you have had the same tenant since before 6 April 2008), you will not be affected until you need an EPC. Second, the change only applies to new lettings. So a tenancy within a fixed term, or even during a holding over period, will not immediately be caught (though they would on renewal). Fast forward another 5 years, to 1 April 2023, and the limitation will apply to all tenancies (this phasing in being the so-called 'soft start'). It also seems likely (but not yet confirmed) that in time the minimum energy rating will be increased, so that property efficiency is gradually improved. But that's getting ahead of ourselves. Let us for now concentrate on the more imminent change.

Property owners should now be identifying properties in their portfolio with a low EPC rating. Those with an F or G rating will clearly require thought as to the measures which could be taken to improve energy efficiency before 2018. However, those with an E rating should also be considered. Why? Because for many properties the EPC will be due to expire not long after the new regulations come into force, and it cannot be assumed that a current E rating will remain when the property is re-assessed. Changes in buildings regulations, amongst other matters, could well see the property's rating drop.

Having carried out this initial review, owners can then consider works which could be effected and whether, despite the EPC rating, an exemption might apply. The main ones will in practice be that:

  • The improvements are not cost effective (meaning in most cases that they will not pay for themselves through a reduction in energy bills within seven years);
  • Despite making reasonable efforts, the landlord cannot get consent (e.g. from tenants, lenders or superior landlords) to carry out the works;
  • Expert advice shows that the works will reduce the property's value by at least 5%, or wall insulation required will damage the property.

To take advantage of an exemption, you must register it on the central PRS Exemptions Register. The exemption will then last for 5 years.

If an exemption does not apply, landlords will need to consider when works will be carried out. Ideally they will be scheduled during void periods. There will inevitably be a lead in period, and so careful management of any upcoming tenant exits will be required. There is also a potential impact on dilapidations claims which will need to be considered too.

What happens if you do not comply with the regulations? Will the tenancy be void, or the tenant forced to vacate? Despite concerns that might be the case, the regulations do not have that effect. However, there are penalties. Fines can be imposed up to a maximum of £150,000. There are also 'naming and shaming' provisions, with the relevant breaches and amount of any fines levied being recorded on the PRS Exemptions Register.

Whilst 2018 may still seem some way away, there is potentially much to be done to comply with the MEES regulations before then. Portfolio reviews, assessment of improvements works and their effects, seeking consent for works, securing valuation advice, applying for exemptions, managing tenant renewals/exits, scheduling works and considering dilapidations will all take time. Suddenly 2 years is not sounding such a long time after all, and landlords would be well advised therefore, to be looking at the issue now.

UPDATE (APRIL 2016): The PRS Exemptions Register was due to be available for registrations from 1 October 2016. Under draft Regulations before Parliament however, this is proposed to be delayed until 1 April 2017 to allow "additional time to design and fully user test the Register, ensuring an optimal customer experience."

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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