From 1 April 2018 it will be unlawful to grant a tenancy of a property with an EPC rating of below E (known as a sub-standard property) unless an exemption applies and has been validly registered. So what are the risks of buying a sub-standard property?
If you buy a sub-standard property today, and this is let to tenants, you will not be in breach of The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the MEES regulations) on 1 April 2018. However, you could find yourself in breach further down the line when it becomes unlawful to continue to let a sub-standard property. Assuming that you are dealing with a non-domestic property, the prohibition on continuing to let a substandard property will come in on 1 April 2023.
If the property is not currently let, or you want to grant additional tenancies prior to 1 April 2018, you can do so now without carrying out any energy improvement works without being in breach of the MEES regulations. However, you should think carefully about whether this is the most prudent course of action. It may be that the works required to raise the EPC rating are fairly inexpensive. Carrying out works to a vacant property is much simpler than doing so with a tenant in situ because the landlord does not have to take into account the rights of the tenant under the lease.
A more energy efficient property is also likely to command a higher rent. There are common energy efficiency quick-wins across a range of commercial building types that are low cost to implement and can improve EPC ratings by either one or two grades.
The building fabric plays the leading role in the energy efficiency of a property, and is therefore a vital element in the EPC rating. For example, over 20 per cent of heat in a building is lost through the roof. Improving insulation levels in this area can often be cost effective, particularly with pitched roofs. Further heat loss takes place through the fabric of the walls. Improving insulation here is particularly cost effective in properties with cavity walls. The procedure causes minimal disruption to staff and business operations during installation, making it suitable to carry out at any time.
HVAC (heating, ventilation and air conditioning) refers to the equipment, distribution network and plant used either collectively or individually to provide fresh filtered air, heating, cooling, and humidity control in a building. Installing more efficient boilers, variable speed heating and cooling pumps, high efficiency chillers and energy efficient system controls are just some of the improvements that will make a difference in this area. Most landlords will have budgeted for upgrading equipment such as boilers and chillers, and they will expect to replace these several times during a building’s lifetime. So by pulling forward planned maintenance and improving inefficient components of the system, rather than replacing like for like, important savings can be made.
Lighting and lighting controls are other areas where relatively simple measures can provide substantial gains. For example, replacing tungsten bulbs or halogen spot lamps with LEDs or compact fluorescent tube lighting can make substantial savings. Lighting controls can also make huge reductions in a building’s energy use, and are not difficult to install. The ideal time for these works would be as part of a general refurbishment during a period of vacant possession, or as ‘one-off’ improvements when the building is wholly or partly occupied. While these improvements can be implemented in an occupied office, it will take considerably more time to carry out.
The vast majority of leases granted on or after 1 April 2018 must comply with the MEES regulations. Leases of 99 years or more are not within the scope of the regulations, and neither are very short leases (of up to six months). However, if a series of six-month leases are granted, the tenancy will be subject to the MEES regulations.
While granting a tenancy in breach of the MEES regulations does not affect the validity of the tenancy agreement, it could lead to a hefty financial penalty. Fines of up to £150,000 can be imposed in respect of non-domestic properties. In addition, details of the landlord and the breach can be published on the PRS Exemptions Register for a minimum of 12 months (the publication penalty). This ‘naming and shaming’ could clearly lead to significant damage to the landlord’s reputation.
So are there any circumstances in which you can grant a tenancy of a sub-standard property on or after 1 April 2018 without being in breach of the MEES regulations? The answer is yes. A landlord will be permitted to let the property if it has undertaken all ‘relevant energy efficiency improvements’ for the property, or there are no relevant energy efficiency improvements that could be made, yet despite this the EPC rating is still below E. The regulations contain a list of items that could be relevant energy efficiency improvements. However, works to non-domestic properties will only be relevant energy efficiency improvements if they can achieve a simple payback of seven years or less.
If the landlord has not carried out all relevant energy efficiency improvements, it may still be able to let the property without being in breach of the regulations if it can show an exemption. It is likely that the consent exemption will be relied on most frequently. In essence, this applies if the landlord has been unable, in the preceding five years, to improve the EPC rating of the property to an E rating or higher, as a result of a tenant or other third party refusing to give its consent.
A landlord can also claim an exemption if, in the preceding five years, it has obtained a report prepared by an independent surveyor which states that making the improvement would result in a reduction of more than five per cent in the market value of the property (or the building of which the property forms part).
The MEES regulations also provide a six-month grace period to certain landlords, by the end of which they will either have to have improved its EPC rating to E or higher, or registered an exemption. These temporary exemptions are very limited, but include the purchaser of a tenanted property. This is because exemptions are personal; they do not pass to purchasers. Therefore, a grace period of six months is given to anyone purchasing a non-domestic property that is subject to a tenancy after 1 April 2023, so that the purchaser is not immediately in breach of the prohibition on continuing to let a sub-standard property.
It is critical to note that any exemption can only be relied upon if it has been validly registered in the PRS Exemptions Register.
From 1 April 2023, a landlord must ensure that any tenancies existing at that date comply with the MEES regulations. This means that if the property is sub-standard, the landlord must either have carried out all relevant energy efficiency improvements or registered an exemption.
For the MEES regulations to apply, there must be a valid EPC. An EPC is valid for 10 years and a landlord is not obliged to produce a new one when it expires. A new EPC will only be required the next time a trigger event occurs, for example when the property is sold or let. Therefore, if the property does not have a valid EPC on 1 April 2023, the landlord will not be subject to the minimum energy efficiency requirements. This could happen if the EPC was obtained in, for example, 2012, and the property is let on a 20-year lease. However, as soon as a new EPC is obtained (either by the landlord or another party, such as a tenant), it will be subject to the MEES regulations.
Landlords should therefore ensure that they are in control of the commissioning of any EPCs, so that they do not find themselves in breach of the regulations if a tenant obtains an EPC which reveals a rating of below E.
The MEES regulations are complex, and whether or not a letting will benefit from an exemption can be difficult to determine. Therefore, you should seek expert advice before letting a property which could result in a breach. Lettings of domestic properties must also comply with the regulations. However, the deadlines for compliance and what falls within the definition of ‘relevant energy efficiency improvements’ differ from those for non-domestic properties.
This article was originally published in written Facilities Management Journal and was by Maria Connolly, Head of Real Estate at TLT; Alexandra Holsgrove Jones, Senior Professional Support Lawyer at TLT; and Alan Jones of E.ON Energy Installation Services.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.