Certainty for landlords as commercial property energy efficiency regulations receive parliamentary approval

Out-Law News | 30 Mar 2015 | 5:35 pm | 2 min. read

New energy efficiency standards for privately-let commercial property in England will come into force on 1 April 2018, after the UK parliament passed regulations in one of its final sessions ahead of May's general election.

Environmental law expert Linda Fletcher said that landlords would welcome the certainty given by the final regulations, as there had been some concern that these would not have been passed before parliament was dissolved. Postponing final approval until the next parliament would have risked further changes assuming there was a change in government, she said.

"From the moment the government first mentioned its proposals for minimum energy efficiency standards the real estate sector sat up and took notice, and the proposals have probably had more impact than any other energy efficiency policy or regulation introduced by the government even before any regulations have come into force," she said.

The 2011 Energy Act required the government to set minimum energy performance standards (MEPS) for both domestic and non-domestic privately rented property.

Once in force, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations will require commercial property landlords to have upgraded the energy efficiency of their properties to at least band 'E' standard before they can be leased to new tenants or an existing lease renewed unless certain exemptions apply. This will be extended to cover all leases by 2023. Limited exceptions will apply if it will not be cost effective for the landlord to undertake the necessary work.

The 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 that property for over 12 months; or where the lease is 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 regime.

Safeguards set out in the regulations will ensure that landlords cannot 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 for commercial properties where Green Deal finance is not available.

Landlords will also be exempt where a tenant has refused to consent to the work, where necessary third party consents to the work have been refused, or if the necessary measures would reduce the property's value by 5% or more. These exemptions must be reviewed every five years, and landlords must notify DECC and be listed on a centralised register if an exception applies.

Landlords that rent out a non-compliant property for three months or more could be fined £10,000 or 20% of the rateable value of the property, whichever is greater. The maximum penalty for non-compliance is £150,000.

Similar regulations applicable to privately-rented domestic property have also received parliamentary approval. Minimum energy efficiency standards (MEES) will apply to new residential property leases from April 2018 and will be extended to all leases in 2020. Residential tenants will also have a new right to request necessary improvement works from 2016.