Minimum Energy Efficiency Standards for Commercial Property
As part of the Government's drive to meet its energy efficiency targets the Energy Efficiency (Private Rented Property) England and Wales Regulations 2015 ("the Regulations") come into force on 1st April 2018.
The Regulations set the minimum level of energy efficiency for private rented property in England & Wales. We set out below what the Regulations require in relation to commercial property, what landlords need to do to comply with them and the consequences of failing to do so.
What do the Regulations require?
From 1 April 2018, subject to certain exemptions, landlords of commercial properties in England and Wales must ensure that their buildings have an energy efficiency rating of at least an E before granting a new tenancy or renewing an existing one.
From 1 April 2023, the Regulations will be extended to cover all existing commercial tenancies.
What commercial property lettings are caught by the Regulations?
All properties that are not a dwelling and which are let under any type of tenancy are covered by the Regulations.
However, there are exceptions. The Regulations do not apply to:
- Lettings of 6 months or less (except where the tenancy contains provisions for renewal or extension of the term beyond 6 months or the tenant has already been in occupation for a continuous period of more than 12 months when the tenancy is granted);
- Lettings of 99 years or more; and
- Properties that do not require an Energy Performance Certificate. This applies to places of worship, many listed buildings, those that are not heated or ventilated using power, buildings below a certain size, buildings that people do not ordinarily visit, buildings scheduled for demolition, industrial workshops with "low energy demand", and most agricultural buildings, amongst others.
What do landlords need to do to comply?
If a landlord wishes to let commercial property (that is caught by the Regulations) from 1 April 2018, or continue to let commercial property from 1 April 2023, it must determine whether the property meets the minimum energy efficiency standards. If the property has an EPC rating that is below E then, in order to lawfully let the property, the landlord will need to carry out relevant energy efficient improvements to increase the rating.
Such improvements can be found in the recommendation report accompanying a valid EPC, in a surveyor's report or in a Green Deal advice report. Improvements may include works such as double-glazing and wall insulation measures.
Once the property has an EPC rating of at least an E, the property can be let. EPCs are valid for ten years and it is not necessary to obtain a new EPC for each letting, or for example when the property is sold. Even if an EPC has expired, it is only necessary to update it when a transaction, such as the grant of a new tenancy, triggers it.
Are there any exemptions?
There are exemptions which will permit a landlord to let a property with an EPC rating that is below E, or what is known as a "sub-standard property":
- The "Golden Rule" – where an assessor determines that all relevant energy efficient improvements which can be made to the property either have been made or cannot be made and yet the EPC still remains below E. This exemption lasts five years, after which period the landlord must make a further attempt to improve the property's EPC rating.
- Third Party Consent – where the landlord, having made a reasonable effort, has been unable to obtain third party consent (such as from the mortgage lender or tenant) to the improvement works. This exemption lasts five years or until the tenancy of the non-consenting tenant comes to an end (whichever is sooner).
- Property devaluation – where an independent RICS surveyor advises that the improvement works would reduce the market value of the property by more than 5%. This exemption lasts five years.
Exemptions must be registered on the PRS Exemptions Register.
If the property is sold, any exemption does not pass over to the new owner/landlord.
A six month exemption exists in certain circumstances where a person becomes a landlord suddenly.
Who enforces the Regulations?
The enforcement authority is the local weights and measures authority, which will use the PRS Exemptions Register to support enforcement.
What are the consequences of a failure to comply with the Regulations?
Compliance notices can be served on a landlord up to 12 months after the suspected breach, even if the person who committed the breach is no longer the landlord of the property in question. Compliance notices may request documentary evidence to demonstrate the property's EPC rating or exemption.
Landlords face hefty financial penalties for breaching the Regulations. The amount of the penalty depends on the length of time of the breach, with penalties for just one breach potentially accumulating to over £150,000.00.
Landlords also face publication penalties, whereby details of the breach, property, landlord and financial penalty will be published on the PRS Exemptions Register.
On a practical level, it will technically not be possible to let a sub-standard property and this will likely have an impact on any valuation obtained for lending purposes and any rent reviews carried out and as such cannot be ignored.
A lease is not deemed to be invalid or unenforceable if a landlord is in breach of the Regulations and therefore, this does not provide grounds for the landlord to terminate the tenancy.
In the period up to 1st April 2018, landlords of properties with a low EPC rating that are either currently vacant or will be vacant before the deadline have to decide what to do and how to comply with the regulations, whether that be by carrying out improvement works or claiming an exemption. Landlords with tenants of leases extending beyond 1st April 2023 have more time to make the same decisions but, for all landlords of sub-standard properties, doing nothing is not an option in the medium term.