Out-Law / Your Daily Need-To-Know

UK government sets out long-awaited energy efficiency standards for new property rentals

Out-Law News | 25 Jul 2014 | 3:53 pm | 3 min. read

Landlords in England would have to upgrade the energy efficiency of their properties to at least an 'E'-rated Energy Performance Certificate (EPC) standard before they could let them out under plans put forward for consultation by the UK government.

However, environment and energy law expert Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com, said that it was still not clear whether lease renewals would initially be caught by the new rules, which are due to come into force from 1 April 2018. The government's preference is for a phased introduction whereby landlords of properties currently being rented would have an additional five years to comply with the new requirements, according to the Department of Energy and Climate Change (DECC) consultation.

"The consultation makes it clear that the government favours a phased introduction, so that the requirements apply to all new leases, from 1 April 2018; but by stating 'to new tenants' it is questionable if the intention is to exempt lease renewals," she said.

"From 1 April 2023 the requirements would apply to all leases with the government stating that this additional five years is around the time taken for the average commercial property lease to expire and that it provides sufficient time for landlords and tenants to negotiate and agree any improvements before the back-stop date bites. No doubt the real estate sector will have a lot of comments to make as to this assumption," 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 in England and Wales. Fletcher said that the lack of detail in the proposals had resulted in "consternation in the sector as to what this really meant and, in particular, the reference to the words that letting may be defined to include 'continue to let' and how that could work in relation to existing leases where they fell below the golden EPC asset rating".

From 1 April 2018, landlords would not be able to rent out domestic or non-domestic property with an EPC rating below E, unless they had already made use of "all available funding or subsidy to make all reasonable improvements" and are still unable to increase the energy efficiency of the property to the required minimum standard.

Proposals for improving the energy efficiency of domestic properties also include a legal obligation requiring the government to take action to raise the EPC ratings of as many fuel poor homes "as reasonably practicable". EPC ratings should reach Band E by 2020, Band D by 2025 and Band C by 2030, according to the consultation. Households are considered to be 'fuel poor' if they are on low incomes but their energy costs are high, which could be because the property is poorly insulated. Domestic tenants would also be given the right to request that their landlords carry out energy efficiency improvements from 2016.

DECC consultations on both the domestic and non-domestic rules run for six weeks, closing on 2 September 2014. Energy and environmental law expert Linda Fletcher said that this gave affected bodies very little time in which to "review and formulate a response on these important proposals". According to the consultation document, 18% of non-domestic properties for private rental currently fall below the proposed new standard, with an EPC rating of F or G, she said.

"DECC have spoken with a number of industry bodies but it is clear that there needs to be a strong and large response from organisations at all life cycle stages of a commercial property as to how this regulation will be difficult to implement and the impact it will have, and is already having, on the value of property portfolios," she said.

"Certainly in Scotland they are approaching this differently. The proposed regulations, which are expected to come into force in autumn 2015, provide that on sale or lease of a commercial property the seller or landlord must, if the property does not meet 2002 or later building regulations standards, provide the buyer or tenant with an action on carbon and energy performance plan (ACEP) containing an EPC and an action plan identifying how improvements in energy performance can be made. The landlord or buyer will then have the option of wither carrying out the works within three and a half years or recording the energy usage of the property over a period of time with a view to reducing energy consumption," she said.

Fletcher said that although the Scottish government could introduce MEPS at a later date, it would only do so if the less stringent measures did not improve energy efficiency.

DECC also published its response to a consultation on changes to the Energy Companies Obligation (ECO) scheme, which took place at the end of last year. It has confirmed that it will extend the scheme, through which energy suppliers are required to subsidise energy efficiency measures for low-income households, for a further two years, until 2017. The scheme is expected to be worth around £520 million per year and support an average of 260,000 households annually.