The Minimum Energy Efficiency Standards Regulations

Posted by Sean Palka on
Important News for Commercial Landlords and Tenants

The Government's consultation on the introduction of Minimum Energy Efficiency Standards for non-domestic properties has now closed, and the regulations are being drafted ready to become law in early 2015. 

Even at this stage though, we can say with some certainty what the main obligations on commercial landlords will be as an earlier consultation involved all the significant stakeholders that will be affected by them. This means that landlords and tenants can start preparing for them.

From the commercial property owner's perspective, the first essential point to note is that the regulations will only apply to tenanted properties, not owner-occupied properties, so those readers without tenants and never intending to let their properties can look away now unless, of course, they aren't sure that they will never become an "accidental" landlord, for instance needing to sublet surplus space, in which situation even tenants can themselves become landlords.

The second point to note is that the Government has never made a secret of the fact that it does not want to impose significant additional financial burdens on business while it is recovering after the financial crisis and, for this reason, it is fair to say that the obligations to be imposed are business-friendly and, indeed, that they might not have been imposed at all at this stage if there hadn't been a legally binding obligation to comply with a relevant EU directive by 2018.

Possibly the most business-friendly aspect of the regulations is the "soft start". This means that properties will only have to meet the minimum standards when they are freshly let on or after 1st April 2018. If a non-compliant property is already let on or before that date, the need for compliance will be delayed, possibly until the "hard stop" date of 1st April 2023 after which all tenanted properties, whenever they were let, must comply subject to any exemptions that might be available, about which more below.

Honouring its self-imposed commitment not to increase the burden on business, the Government says that it has identified the "split incentive", where the landlord improves the energy efficiency of a property and the tenant then enjoys lower energy bills as a result, and eliminated it by creating a scheme drawing on "Green Deal" principles transferred across from the residential sector.

Under this scheme, the cost of the works would be financed by a commercial Green Deal (or equivalent) lender who would then collect the financing cost through the energy bills paid by the tenant, which are artificially increased to cover it. Crucially though, the overall amount of the tenant's energy bill would not exceed the amount that it would have paid for energy if the improvement works had not been carried out. Achieving this "no-cost" improvement is to be known as the "Golden Rule" and it will be a key aspect of the regulations that any necessary improvement works will not have to be carried out unless they meet it.

Further emphasising the light touch nature of the regulations, the minimum standards will be linked to the asset rating shown on a property's Energy Performance Certificate, which run from "A" to "G", with only those below an "E" rating, estimated to be about 18% of the commercial property stock in the UK, requiring any works at all, and then only if the property does not come within one of the several exemptions alluded to above.

Before moving on to the exemptions, however, it is important to understand that, owing to the link to the EPC register, if a property does not require an EPC, then it will not need to comply with the regulations. There are many reasons why a property might not have an EPC , for instance because it has not been transacted since the EPC rules came into force in 2008, or because it is a qualifying building of historical or archaeological interest, or because it is below the minimum size threshold.

The exemptions are intended to minimise the number of lettable properties effectively taken out of circulation by the regulations even if they do not achieve an asset rating of "E". They will exist, for example, if the necessary improvement works do not meet the Golden Rule, or where a third party consent is required for the works and that consent is not given.

Exemptions will, though, only last for 5 years (or until a non-consenting tenant vacates the property if shorter), as technology might have brought compliance costs down and/or the third party's attitude might have changed, although always bear in mind that there might be another exemption immediately available.

Those wishing to take advantage of an exemption will need to hold evidence that the works did not meet the Golden Rule or that a required consent was refused, and there is even talk of a possible "Certificate of Exemption" even though this would create bureaucracy and therefore add cost.

Compliance will statutorily be the responsibility of the landlord (or intermediate landlord in the case of an undertenancy), not the tenant, but could be passed down to a tenant if it agreed to accept the obligation. Be aware though that, even if compliance is passed down contractually, any penalty for non-compliance will still land on the landlord's desk so appropriate indemnities will be required.

Regulations of any stripe inevitably need to be enforced, and enforcement in this case will be through the Trading Standards Office, as compliance with the EPC regulations is, but even the Government has spotted difficulties in this regard until the "hard stop" date. For instance, while the TSO will have access to the EPC register and will therefore know which properties that need an EPC have an EPC asset rating of lower than "E", its officers will not necessarily be able to find out if a property is let and, if it is, whether it was let before or after the "soft start" date, or whether or not it has an exemption. Compounding their difficulties, with limited resources the TSO might struggle to keep up with its enforcement duties unless its political masters require it to prioritise them in the face of more politically popular activities such as protecting the consumer from unscrupulous traders. If and when a landlord is found to be in breach of the regulations, however, it will be the TSO that will issue the penalty notice based on the rateable value of the non-compliant property.

Turning to the other side of the landlord and tenant relationship, the overriding protection for a tenant that unwittingly finds itself in a non-compliant property is that the Government has made it crystal clear that in no circumstances will the regulations require a tenant to vacate a non-compliant property to enable it to be brought up to the minimum required standard.

In conclusion, if it was the Government's intention to require the least possible to be done to comply with the EU directive, then it has succeeded and neither landlords nor tenants should have much to fear from these regulations, especially given that there will be a minimum of 3 years from now before they have a direct effect on the ability to let a non-compliant property. The attitude of lenders will, however, have a significant impact on compliance as, if they won't lend on a property below an "E" rating whether or not it has an exemption, then the works will have to be done.

Sensible landlords will, in any event, be preparing the ground when granting new leases by either seeking to require that tenants carry out the necessary work, or by including them in the service charge, or at least reserving the right to come onto the property to do the works itself so that the tenant's consent is not needed.

About the Author

A specialist in Real Estate, Sean leads the Real Estate and Corporate Occupier team on the South Coast as well as being involved in the Construction and Development Sector Group.

Sean Palka
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023 8085 7480

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