Are you clued up about the new regulations that require commercial properties to have a minimum standard for energy performance?
Simon England explains the legal and financial implications for commercial property landlords.
Despite the UK’s continued push towards a low carbon economy, commercial landlords have previously not been required to meet any legal obligations relating to energy performance standards when renting out their properties.
But all that is due to change following the introduction of the Energy Efficiency (Private Rented Property in England and Wales) Regulations 2015, which will usher in minimum energy efficiency standards for commercial properties.
From 1st April 2018, private landlords will have to ensure that before a potential property is rented out, it must have a minimum energy performance certificate of band ‘E’ or above. Any ratings below band ‘E’ will mean that landlords will either have to undertake the necessary works to improve the energy efficiency rating, or be prevented from granting new leases.
Failure to comply may result in civil penalties being imposed, and potential breaches being published in a public register. The regulations will initially apply to new leases and lease renewals.
However, from 1st April 2023, the scope of the regulations will be increased to include all existing leases.
Landlords should therefore take particular note of the changes to avoid unnecessary costs being accumulated and penalties being imposed for non-compliance.
What situations will the new regulations apply to?
The new regulations will apply to all leases granted for over six months, and to leases of 99 years or under. There are exemptions, however, under which landlords will be able to continue to let properties which have an EPC rating of ‘E’ or below without having to undertake the required works to improve energy efficiency.
The exemptions to the new regulations are as follows:
Lease terms – If the property in question has a short lease term of under six months, the exemption will apply. The exemption will also apply to long leases of over 99 years.
Refusal of consent – Where a landlord is required to obtain consent from an occupational tenant before work can be undertaken, and the tenant has refused consent. Or where consent of a third party is required, but has been refused, the landlord will not be required to undertake the required works to improve the energy efficiency rating.
Reduction in property value – A landlord will be exempt if a report has been obtained by an independent surveyor, and states that the proposed works to improve energy efficiency would reduce the market value of the property by 5% or more. It is important for landlords to note that this exemption will only last for a period of five years, after which the landlord will be required to obtain a new report for the exclusion to continue.
Costs effectiveness – If a landlord can demonstrate that the proposed works to improve energy efficiency would provide no repayment within a seven year period, the landlord will be exempt.
Adverse impact upon property – This exemption will apply if a report from an independent installer of the relevant energy efficiency works has been obtained, and the expert is of the opinion that the proposed works would have a potential negative impact on the fabric or structure of the property.
Properties which are EPC exempt – This includes properties such as listed building, places of worship or religious activity, temporary buildings, and buildings about to be demolished.
In order for any of the above exemptions to apply, the landlord must register details of the exemption, together with the relevant supporting information on the Exemptions Register. The information stored on the register will be valid for a period of five years. After this time, a new application will need to be made.
What are the penalties for breaching the regulations?
Where a breach has been identified, landlords will be served with a compliance notice. If this is not complied with, a penalty notice will then be served.
Ultimately, the landlord can be issued with either a financial penalty of up to £10,000 or 20% rateable value, a publication penalty, or both.
What action do landlords need to take now?
The new regulations will mean that commercial landlords need to consider their property portfolios to determine whether any properties fall within the new regulations, or otherwise face the threat of penalties. Landlords must ensure that clear records of EPCs are kept and maintained.
Where landlords have identified properties which fall below the recommended efficiency, and where the property does not fall under an exemption listed above, landlords must take steps to undertake the necessary works before the deadline of 1st April 2018 comes into force.
Landlords are encouraged to develop a plan of the works to ensure properties are regularly reviewed as part of a long term maintenance and refurbishment strategy. Consideration also needs to be given to when the required works will be undertaken; for example, during void periods, or during lease breaks.
Where landlords have identified potential properties which require work to be undertaken, the costs of compliance should be considered, as well as the development of strategies to secure funding. Planning ahead will prevent last minute cost issues arising, prevent cash flow interruptions, and provide landlords with the opportunity to secure funding in good time.
To plan for the future, landlords are also advised to be more diligent, and consider undertaking relevant works for properties which have a rating of band ‘D’. Given the government’s initiative to reduce carbon emission, it is likely that standards will be raised over time, and by taking early precautions on borderline properties, this reduces the risk of non-compliance.
As a commercial landlord, how concerned are you about the new regulations concerning energy efficiency? Let us know your thoughts in the comments below.
For more information on complying with new minimum energy efficiency regulations for commercial landlords, contact Harrison Drury today on 01772 258321.