New minimum energy efficiency standards for commercially let properties from April 2018

10 / 03 / 2015

The law on environmental requirements for commercial property is changing. This bulletin tells you what you need to know.

Why have the draft Regulations been issued?

In accordance with the Government’s overarching objective of reducing carbon and greenhouse gas emissions, the Energy Act 2011 requires the Government to improve the energy efficiency of buildings in the privately rented sector.

If enacted, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations) will apply to all eligible leases of commercial premises in the sector.

What are the key dates and standards?

  • From 1 April 2018 properties will be required to have at least an “E” Energy Performance Certificate (EPC) rating upon the grant of a lease by a landlord to a new or existing tenant.  This requirement is in line with the residential sector.
  • From 1 April 2023 all privately rented properties with an EPC must have at least an “E” EPC rating.  This includes properties where a lease is already in place and an existing tenant is in occupation of premises.

What do the Regulations mean for landlords?

  • Post 1 April 2018 if a property falls below the minimum energy efficiency standards it will be unlawful to let or sublet the property.  This means that landlords can no longer ignore energy efficiency standards and properties will need to meet, or be improved to meet the minimum ratings.  Ensuring that a property complies with the Regulations will become as important for landlords as compliance with obligations under the Disability Discrimination Act 2005 and fire safety regulations.
  • A landlord wishing to sell a property as we near 1 April 2023 may find that its marketability reduces unless the property meets the minimum energy efficiency ratings. There could also be an impact on rent reviews.

What do the Regulations mean for tenants?

  • From 1 April 2018 a tenant will not be able to underlet a property, if the property does not satisfy the minimum energy efficiency standards.  It will be unlawful to sublet if the property does not comply with the specified energy ratings.
  • At the end of the term of a lease a landlord is likely to require that a property is handed back above the minimum energy efficiency standards.  There are traps for tenants as reinstatement could involve converting a property or modifying the building services and systems which may impact on the energy efficiency rating of the property. Careful analysis of each lease will be needed.

What are the penalties for non-compliance with the Regulations?

The penalties for non-compliance are high.  The penalty for renting out a non-compliant property for 3 months or more is the greater of £10,000 and 20% of the rateable value of the property, with a maximum penalty of £150,000 and publication of details of the breach.

Conclusions

The new energy efficiency standards are a complex and evolving area of law.  If you would like to discuss the Regulations and the potential impacts on your portfolio please get in touch with us.

The draft Regulations have been warmly welcomed by the property industry as an opportunity to improve the energy efficiency of existing buildings.  Until now many landlords had been reluctant to pay for improvements, as it is tenants that benefit from the resulting lower energy costs

We will need to wait and see if the standards set out in the draft Regulations are adopted.  In the longer term the likelihood is that the minimum energy efficiency standards for properties will be raised further due to the targets on energy efficiency set by the European Commission. It is disappointing that the Government did not include a trajectory of the minimum required energy standards in the Regulations.  This would have provided the property industry with longer term certainty as to the investment required