While the Energy Performance Certificate ("EPC") has been with us since August 2007, it has been largely viewed as a administrative bother that has to be done before a premises was to be let or sold that once seen could be quickly discarded and ignored. This was even the view where the premises was given a very low energy efficiency rating. Due to legal changes due to come into force from next April this is the case no more!
What are the changes coming into force for Landlords?
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 are bringing in minimum energy efficiency standards ("MEES") so that where the EPC rating of a premises falls below a band E rating (i.e. where the rating is an F or G) that premises is classed as "sub-standard". Where commercial premises are sub-standard it will be unlawful for landlords:
- to grant, extend or renew a lease of the commercial premises from 1st April 2018; and
- continue to let the commercial premises from 1st April 2013.
where the lease is for more than 6 months and less than 99 years.
Consequently, where a landlord wishes to let sub-standard premises they will need to undertake the necessary energy efficiency improvements ("EEI") identified in a recommendation or surveyor's report to improve the EPC rating of the premises. To qualify as an EEI, the improvement needs to increase the energy efficiency of the premises and be cost effective in that the costs to implement are likely to be recoverable from the predicted energy savings as a result of that improvement over the next 7 years.
An improvement will not qualify as an EEI where it would damage the fabric or structure of the premises or building of which it forms part.
Can landlords recover the costs of EEI?
Where the landlord pays for the costs of EEI, these can be recovered from tenants via service charge provisions if the wording in the lease permits this.
Are there any exemptions?
There are several exemptions which are set out below:
- The landlord has not been able to obtain the consent to the EEI from the tenant or other third party (such as for example a mortgagee or the Local Authority) required to be able to carry out the works. To utilise this exemption, the landlord must have exercised reasonable efforts to obtain the required consent or confirmation.
- The landlord's surveyor has reported that the EEI would result in a reduction of 5% or more in the market value of the premises.
- The landlord has become the landlord of the premises suddenly by virtue of a court order, operation of law or contractual obligation. Examples that could fall under this category include lease renewals under the Landlord and Tenant Act 1954 and where the landlord has obtained an overriding lease under the Landlord and Tenant (Covenants) Act 1995 where they were a guarantor or former tenant of a lease. This type of exemption is only temporary as it is only available to the landlord for 6 months. The landlord is therefore required to undertake the EEI works by the time the 6 month period from the date they became the landlord.
If a landlord believes that they may qualify for an exemption where their premises is sub-standard they must register an exemption on the Private Rented Sector exemptions register ("The Register"). Exemptions are only valid if they have been registered on the Register.
The Secretary of State for Business, Energy and Industrial Strategy ("BEIS") is required to maintain the Register. Landlords will need to assess quickly if any of the exemptions apply to protect themselves from falling foul of the legislation if new leases are in the pipeline for early next year so that they can apply to the Register.
The Register service is currently running as a pilot and therefore landlords currently wishing to register an exemption will need to contact BEIS directly.
What are the penalties for non-compliance?
Where penalty notices are issued for non-compliance, the name and address (if not an individual) of the offending landlord may be published on the Register ("the Publication Penalty") and / or financial penalties up to £150,000 may be imposed depending on the length the sub-standard premises have been let.
If a landlord provides false or misleading information to the Register, the landlord may face a financial penalty not exceeding £5,000 and /or the Publication Penalty.
Does non-compliance with MEES make a lease defective?
No, the validity or enforceability of the lease is not affected where the landlord has not complied with MEES.
What is the position for listed buildings?
Listed buildings or buildings within a conservation area ("LBCA Buildings") are not automatically exempt from the MEES regime.
There is an expectation that LBCA Buildings should conform to MEES unless the works required to meet MEES would unacceptably alter their character or appearance. BEIS provide some examples of energy performance measures which may alter character or appearance of a building which include external solid wall insulation, replacement glazing, solar panels, or an external wall mounted air source heat pump.
Landlords with LBCA Buildings are therefore recommended to instruct an EPC assessment of their property so that a draft report can be prepared so it can be ascertained whether it a F or G rating is likely. If not, the report can be officially logged and the EPC filed for future lets. Where the rating on the draft report highlights a F or G rating, the recommended works will need to be considered to ascertain whether any can be carried out under the listing restrictions to improve the rating of the premises. Those works that can be implemented should then undertaken.
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.
