Minimum energy efficiency standards – are you ready?

The Department of Energy & Climate Change has recently issued responses to the consultations dealing with minimum energy efficiency standards in domestic and non-domestic properties.  We focus here on non-domestic buildings.  The minimum energy efficiency standard will be set at an E energy performance certificate (“EPC“) rating, according to the Private Rented Sector Minimum Energy Efficiency Standard Regulations (Non-Domestic).

When the regulations take effect, landlords will not be able to let commercial properties with the lowest EPC ratings of F or G, unless they take steps to improve the energy efficiency of those properties.   

Which Commercial Properties Will Be Caught?

The regulations will capture any property in England and Wales which is not a dwelling and which is let. 

The regulations will not apply, however, to a tenancy for a term of:

• 6 months or less; or
• 99 years or more.  

The first limb cannot be used to sidestep the regulations, since this exclusion will not apply to the granting of a tenancy where the tenant will have occupied the property for in excess of 12 months.  

In addition, certain properties which are specifically excluded from existing EPC obligations (as set out in the EPC regulations themselves) are excluded.   

When Do The Regulations Take Effect?

The Government is employing a phased introduction.

From 1 April 2018, the regulations will apply on the grant of a lease to a new tenant and a lease to an existing tenant.  This captures lease renewals and extensions where the property has an EPC.  

There is a backstop date so that, from 1 April 2023, the regulations will apply to all privately rented property, including where a lease is already in place and a property is occupied by a tenant.  It appears that leases which have already been granted and which extend beyond 1 April 2023 will automatically be in breach of the regulations, if the property is non-compliant and is not rectified before 1 April 2023.  Works to the property in such cases are, therefore, likely to be required during the life of the lease.  

What Must Landlords Do?

Only permissible, appropriate and cost effective improvements are required under the regulations.  In addition, landlords can be eligible for an exemption from reaching the E minimum standard where they can evidence that one of the factors set out below applies.

• The measures are not cost effective, either within a 7 year payback or under the Green Deal’s Golden Rule.  In summary, the latter is that payments for improvements, including any interest charges, must be the same or less than the expected energy bill savings in the first year.
• The landlord is not able to obtain the consents necessary to install the required energy efficiency improvements.  Such third party consents are likely to vary depending upon a range of factors, including the terms in a lease and the nature of the proposed works, but may include consents from tenants, lenders and superior landlords.  Only the consents which a landlord is legally bound to seek and obtain before the works can be undertaken would fall within this exemption.  Landlords must demonstrate that they have used “reasonable efforts” in seeking the relevant consent and landlords will be obliged to demonstrate both that the consent was required and that it was refused.
• A relevant, suitably qualified expert or independent installer provides written advice that:

– the measures will cause a net decrease of 5% or more to the value of the property, excluding the cost of the measures themselves and their installation; or

– the wall insulation required to improve the property will damage the fabric or structure of the property.  

Upon the expiry of an exemption, the landlord will either need to achieve the minimum standard or obtain another exemption, if one is available.  

If the landlord believes that an exemption applies, in order for the exemption to be valid, the landlord must notify the exemption on a centralised register, called the Private Rented Sector (PRS) Exemptions Register (“the PRS Exemptions Register“).  Local authorities will enforce the provisions of the PRS Exemptions Register but it will be run by the Department of Energy & Climate Change.

What Are The Penalties For Non-Compliance?

Where a local authority considers that a property is not compliant or that the landlord has not sufficiently proved an exemption, the local authority can serve a compliance notice on the landlord requesting the further information which it considers necessary to confirm compliance.  If not provided by the landlord, or if not sufficient in its content, the local authority may issue a penalty notice.  

The penalties are designed to take into account the degree and length of the non-compliance.    

If a landlord provides false or misleading information on the PRS Exemptions Register or fails to comply with a compliance notice from a local authority, the penalty is £5,000 and possible publication of the non-compliance.

If the landlord is renting out a non-compliant property, in relation to non-compliance for:

• less than 3 months, the penalty is 10% of the rateable value but with a minimum penalty of £5,000 and a maximum penalty of £50,000 and possible publication of the non-compliance; and
• 3 months or more, the penalty is 20% of the rateable value but with a minimum penalty of £10,000 and a maximum penalty of £150,000 and possible publication of the non-compliance.  

What Should Landlords Do Now?

The minimum energy efficiency rating of E does not look to be going away.

In practical terms, landlords should review the EPCs for their commercial properties.  For any properties falling within the F or G bandings, landlords should determine the cause of the low rating and, if the property is vacant, would be advised to start any improvement works in good time for the 1 April 2018 deadline.  For properties which are currently let, landlords should review the terms of the leases to see which party is responsible for the improvements.  It is advisable that the parties agree responsibility in order avoid argument and confusion later.  

Going forward, landlords should consider including provisions in any new lease which they grant to cover areas on which the regulations may have an impact.  Examples include which party is responsible for carrying out the works for energy improvements, widening landlords’ rights of entry for such works, amending service charge provisions to cover the cost of energy improvements and including as a disregard in an open market rent review any adverse effect on rent attributable to an EPC rating.

At Michelmores, we have considerable experience acting for landlords and tenants on commercial leases and also advising on energy retrofitting for properties.