EPC rating update: Landlords must comply with new requirements

New requirements recently came into force for EPC ratings. Our property litigation team provide an overview of the new requirements and what they mean for landlords of both commercial and residential properties, including listed buildings and buildings in conservation areas.

Following on from our previous blog post about new EPC ratings, it is now unlawful for a landlord to enter into a lease agreement for a commercial or residential property without certain energy requirements being met. Existing tenancies are also subject to this requirement.

What is an EPC?

Energy Performance Certificates (EPCs) are a measure of the energy performance of buildings in the residential, commercial, and public sectors. The EPC provides detailed information about the property’s energy efficiency and carbon dioxide emissions and are a key tool in promoting energy performance improvements in buildings. The rating is scored between A to G with A being the most energy-efficient and G being the least energy-efficient.

Since their introduction in 2007, EPCs have been required when a property is constructed or offered for sale or let. The purpose of an EPC is to indicate the energy performance efficiency of the property to prospective tenants or buyers.

What are the changes?

The changes that apply to rental properties are as follows:

For commercial properties:

• Since the April 1, 2023, it is unlawful for a landlord to enter a lease for a commercial property without a valid EPC in place confirming a minimum energy performance asset rating of E for the property. Existing tenancies are also subject to this requirement.
• If a landlord breaches this requirement, they will face a fine and the details of the breach may be made available to the public. The penalty will be calculated on the rateable value of the property between £10,000 – £150,000 per breach.

For residential properties:

• Since the April 1, 2023, landlords must ensure that there is a valid EPC for the property which confirms that the property has achieved a minimum energy efficiency rating of E to ensure that they comply with the MEES regulations.
• Breach of this requirement will result in a fine of up to £5,000 and a landlord will be unable to serve a section 21 notice unless a valid EPC has been provided to the tenant at any time before the service of the notice.

What is the PRS Exemptions Register?

The MEES Regulations offer a range of exemptions to landlords of commercial and residential properties. However, landlords must provide relevant details on the PRS Exemptions Register to be considered for exemption.

Below are examples of some of the exemptions available:

High-cost Exemption: This exemption applies only to domestic properties and allows landlords to let properties with a rating below EPC E if the cost of making the cheapest recommended improvement is more than £3,500 (including VAT).

Seven-Year Payback Exemption: This exemption applies only to non-domestic properties and allows landlords to forgo recommended measures that do not meet the seven Year Payback test.

All Improvements Made Exemption: This exemption applies to both domestic and non-domestic properties and can be claimed if all the relevant energy efficiency improvements for the property have been made, or if there are no improvements that can be made.

Wall insulation Exemption: This exemption is applicable to domestic properties that contain a certain type of cavity or other wall insulation.

Devaluation Exemption: This exemption can be claimed if an independent valuation suggests that making the relevant improvements would decrease the market value of the property or building by more than 5%.

New landlord Exemption: This exemption is only temporary and lasts for six months. It applies to both domestic and non-domestic properties and is available to landlords who have recently become property owners.

All exemptions are valid for five years except for the New Landlord Exemption. After the exemption period ends, landlords must make efforts to improve the property’s EPC rating to meet the minimum energy efficiency standard. If this cannot be achieved, a new exemption may be registered.

Property owners should also be aware that if a property on the PRS Exemptions Register is sold or transferred, the exemption doesn’t transfer with the property. The new owner of the property must register a new exemption or improve the property.

Considerations for property lenders

• If the property does not meet the minimum energy efficiency standards (MEES) and is not registered on the PRS Exemptions Register, your borrower will need to invest in improvements to increase its energy performance rating to at least EPC E.
• Failure to comply with this requirement may result in a loss of rental income until the necessary improvements are made.
• If your borrower continues to rent out a non-compliant property, they will be in violation of MEES Regulations, and this may result in legal penalties.

Considerations for the future

The Minimum Energy Performance of Buildings Bill is currently under consideration in parliament and is expected to become law in the near future.

The proposed requirements include the following:

• Domestic properties must achieve an EPC rating of at least C by 2035, where it is practical, cost-effective, and affordable.
• From December 31, 2025, all new tenancies of privately rented properties must have a minimum EPC rating of C.
• From December 31, 2028, all existing tenancies of privately rented properties must also meet a minimum EPC rating of C.
• By December 31, 2030, mortgage lenders must ensure that the average EPC rating of their domestic portfolios is at least C.
• Rented non-domestic buildings must achieve a minimum EPC rating of B by 2030, with certain exemptions.

In the long run the new regulations are there to encourage building owners and occupiers to improve the energy efficiency of their properties and contribute to the wellbeing of the environment.

The objective is to contribute to the government’s aim to achieve net-zero emissions by 2050.

It is important to be prepared for these changes. If you are a landlord seeking advice on how to comply or a tenant wanting to ensure that your landlord meets the EPC new ratings, please contact Harrison Drury’s property litigation team on 01772 258321.