The Government has introduced regulations to prohibit the letting of commercial properties in England and Wales rated F or G on their Energy Performance Certificates (EPCs) until their energy efficiency is improved and attains at least an E rating. It is believed that the regulations could catch up to 17% of commercial buildings.
Rather than a "soft" or "hard" start, the Government has opted for a soft start with a hard backstop date – in other words the phased introduction which it had previously indicated was its preferred option. This means:
- from 1 April 2018, the regulations will apply to new leases granted to new or existing tenants (so lease renewals will be caught), and
- from 1 April 2023, the regulations will apply to all leases, including leases that already exist on that date with tenants in occupation.
The regulations apply to the non-domestic private rented sector in England and Wales, defined in the Energy Act 2011 as any property let on a tenancy, which is not a dwelling. The regulations will exclude from this definition any property which is let on a tenancy which is granted for a term of six months or less (provided the granting of the tenancy does not mean the tenant will have occupied the property for in excess of 12 months). The six month exemption will be welcomed by SME occupiers. However it cannot be used repeatedly, to prevent this exemption being used to circumvent the regulations. Any property let on a tenancy for 99 years or more will also be excluded. All non-domestic property types are in scope of the regulations, except for those specifically excluded from existing EPC obligations such as, for example, buildings with Display Energy Certificates or buildings about to be demolished.
As explored in the consultation document, the regulations will include a number of safeguards to ensure that only permissible, appropriate and cost effective improvements are required under the regulations. Landlords will be eligible for an exemption from reaching the minimum standard where they can evidence that one of the following applies:
the measures are not cost-effective, either within a seven year payback, or under the Green Deal's Golden Rule
despite reasonable efforts, the landlord cannot obtain necessary consents to install the required energy efficiency improvements, including from tenants, lenders and superior landlords
a relevant suitably qualified expert provides written advice that the measures will reduce a property's value by 5% or more, or that wall insulation required to improve the property will damage the property.
Local authorities will enforce the provisions. In most cases the Government expects Trading Standards to undertake enforcement activity, but local authorities may choose to use other functions.
Landlords who consider that an exemption applies, enabling them to let a property below an E EPC rating, will need to lodge an exemption on a centralised exemptions register. This register will be available in 2016.
The market has known these regulations were planned since 2011 when they were included in the Energy Act. Since then, the industry has been calling for certainty, particularly on how and when the regulations would be introduced. From this perspective, today's announcement is to be welcomed and we look forward to seeing the actual regulations. However landlords who have granted 10 year leases of F and G rated properties since April 2013 would no doubt have favoured a later long stop date. It now appears that on 1 April 2023 such leases will automatically breach these regulations.
For more information please contact:
Rhian GyngellProfessional Support Lawyer, Real Estate, London
+44 20 7466 2117