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Out-Law News 3 min. read

New energy efficiency standards for privately-let commercial property confirmed for 2018


Commercial property landlords in England will be legally required to upgrade the energy efficiency of their properties to at least band 'E' standard by 2018 before they can be leased to new or renewing tenants, the UK government has confirmed.

The new rules will be extended to cover all leases by 2023, according to the government's response to its consultation on the changes. They will require landlords to improve the energy efficiency of their properties unless it would not be cost effective for them to do so. Similar rules for the domestic property rental sector will come into force for new residential property leases in 2018, and be extended to all leases in 2020. Residential tenants will also have a new right to request necessary improvement works from 2016.

The 2011 Energy Act required the government to set minimum energy performance standards (MEPS) for both domestic and non-domestic privately rented property. Environmental law expert Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com, said that this long lead time meant that the introduction of the new standards had "probably had more impact than any other energy efficiency policy or regulation introduced by the government" long before their coming into force.

"This consultation response from the government has been long-awaited and will be welcomed by the real estate sector given the impact the proposals have already had on transactions and reviews of property portfolios' EPC asset ratings to see whether retrofitting measures could be included as part of already planned maintenance programmes, as well as the need for certainty for investment decisions," she said.

"The government is clearly trying to pass the regulations before 'purdah' strikes on 31 March, and although certainty at last will undoubtedly be welcomed by the industry there are still a number of issues that do not appear to have been considered fully in the regulations as laid before parliament. For example, the obtaining of third party consents to energy efficiency improvements and a five-year exemption if consent is not given unless that tenant then vacates, which for a multi-let building is perhaps too simplistic; and the inclusion of the grant of renewal leases from 1 April 2018 when the physical carrying out of any improvements will be logistically difficult," she said.

The non-domestic regulations will apply to any property let on a tenancy which is not a dwelling, subject to some exceptions. These include where the lease is for a term of six months or less, provided that the same tenant has not occupied the property for over 12 months; and any property let on a tenancy for 99 years or more. Property types that are specifically excluded from the energy performance certificate (EPC) regime are also excluded from the scope of the new regulations.

A number of "safeguards" are included to ensure that landlords will not be forced to carry out improvement works that are not "permissible, appropriate and cost effective". These include where the improvement works do not meet the 'golden rule' under the Green Deal, which limits borrowing to the amount that would be covered by the money saved on fuel bills, or over a seven-year payback period where Green Deal funding is not available. This is because, at the moment,  no commercial Green Deal finance is available. Landlords will also be exempt where a tenant has refused consent to improvement works or Green Deal funding in the past five years, or where necessary third party consents to the improvements have been refused in the past five years. They will also be exempt if the necessary measures would reduce the property's value by 5% or more, which again must be reviewed every five years. The landlord must notify DECC if an exemption applies and be listed on a centralised register.

In certain circumstances, a landlord will have six months from the date that a tenancy is granted in order to comply with the requirements of the regulations. These include where the lease is granted under a contractual obligation, where a lease has been deemed created by operation of law and on the renewal of an existing tenant's lease, among other circumstances set out in the regulations.

The regulations will be enforced by local authorities, which will be able to issue compliance notices requesting further information and, ultimately, penalty notices. Penalties will reflect the degree of infringement and the length of non-compliance. Letting or continuing to let a property in breach of the regulations will not affect the validity of the underlying lease, or the enforceability of any provisions under the lease.

"The penalties for non-compliance are surprisingly hefty, and much higher than the fines for not having an EPC in the first place, with a possible maximum fine of £150,000," said environmental law expert Linda Fletcher.

"What is perhaps disappointing is that the government has not included a trajectory for the minimum energy standard: all it has said is that it will review the progress of the regulations every five years with the first review to take place in 2020. Therefore, there is still uncertainty that the EPC asset rating minimum standard may change in the future, so this will cause continued uncertainty in the market. It may make more sense to carry out greater energy efficiency improvements than required by the regulations if the minimum standard is to tighten over time," she said.

In Scotland, a new offence of selling or letting some properties not built to 2002 Buildings Regulations standards without some remedial action is due to come into force later this year. Fletcher said that an update should appear "later this month" if these were going to remain on schedule to go live in October.

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