By Paul Davies and Michael Green
Buildings account for 40 percent of energy consumption and 36 percent of CO2 emissions in Europe. With pressure mounting to enhance energy efficiency, the European Union is striving to achieve nearly zero-energy for all new buildings by 2020. Ramping up efforts to reduce the property carbon footprint, the UK Government put forward the Energy Efficiency (Private Rented Property (England and Wales)) Regulations in spring 2015. The regulations apply to both domestic and non-domestic premises and are indicative of the Energy Act 2011, which promised to introduce regulation to prevent inefficient properties from being let, coming into force.
From 1 April 2018, new leases (exceeding 6 months) for non-domestic premises will be prohibited unless the relevant premises meets a minimum EPC rating of E. Furthermore, this requirement will be extended to existing leases that have an EPC from 1 April 2023. As sub-standard premises (i.e. buildings rated F and G) are estimated to make up nearly 20 percent of the non-domestic building stock, landlords will need to assess, and in some cases upgrade, the EPC rating of their property portfolios as the regulations come into force. As reducing carbon emissions remains high on the EU agenda, landlords should seek to future-proof their properties and increase the EPC rating of their portfolios beyond that which is required for 2023.
In addition, landlords may also want to consider their acquisition strategy in light of these requirements. While unlikely to impact development opportunities (which will need to be brought into line with the current Building Regulations standards) or high-end city office properties, those looking to acquire logistics, warehousing and industrial units should pay closer attention to EPC ratings.
Balancing Costs and Compliance
The regulations will inevitably require landlords to review their current portfolios and determine the costs necessary to upgrade their existing properties. The regulations do not make any specific provisions to allow landlords to recover upgrade costs from tenants. Should this be the case, specific provisions will need to be built into the lease.
Certain exemptions exist that consider the additional expense to landlords. Prohibition is waived if:
- The necessary consents to undertake the relevant improvements (such as consents from the tenant or consents from mortgage lenders) cannot be obtained;
- The implementation of the energy efficiency measures would reduce the market value of the property by greater than 5%; or
- The cost of the energy efficiency measures would not meet a 7 year pay-back period.
These exemptions will need to be registered and are only applicable for a duration of 5 years The exemptions list is also published, with a view to providing regulators with a list to target.
The level of fines for non-compliance is relatively low and is calculated by reference to the property’s rateable value, up to a maximum of £150,000. Landlords looking to sell sub-standard properties are likely to face the greatest risk and cost, as non-compliance will result in limited market interest. Whilst buyers are granted a 6 month grace period to bring the property in line with regulations, the costs of undertaking the necessary works are most likely to impact the sale price, as buyers weigh up the costs of compliance. Lenders are also unlikely to agree to lend against properties that do not meet the minimum energy efficiency standards.
Notwithstanding the above, it is important to note that even if a sub-standard property is let (in breach of the regulations), the tenant cannot claim a lease is invalid.
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