From 1 April 2018, changes introduced by The Energy Efficiency (Private Rented Sector) (England and Wales) Regulations 2015 make it unlawful to let a commercial or residential property if its EPC does not meet the new minimum energy efficiency rating.
Landlords will be familiar with Energy Performance Certificates. EPCs give properties an energy efficiency rating from A (most efficient) to G (least efficient) and they must be produced in order to market a property to let.
However, a change in the law means that from 1 April 2018 it is unlawful to grant a new tenancy of a residential or commercial property if its EPC does not meet a minimum rating of E. Properties with F or G ratings will therefore be unlettable.
Which properties are affected?
- The new minimum EPC rating only applies to those properties where an EPC is already required – properties which are exempt from requiring an EPC (such as some listed buildings) will not be affected.
- Properties let for a term of less than six months or more than 99 years will not be affected.
- Properties where the EPC is more than ten years old or there is no EPC will not be affected.
The landlord can claim an exemption if any of the following apply:
- The landlord has carried out all of the necessary improvements to a property in order to improve its efficiency rating (or if no improvements can be made) and the EPC rating still fails to meet the minimum rating.
- The works necessary to bring the EPC rating up to the minimum standard would reduce the value of the property by more than 5%.
- The lease does not permit the landlord entry to carry out the necessary improvement works and the tenant refuses consent.
If any of the above exemptions apply, the landlord must register the exemption on the PRS Exemptions Register – the governments’ central registry.
Implications for landlords
The new requirement for a minimum EPC rating will have significant implications for landlords. The latest government data indicates that over 15% of current EPCs for commercial properties fall below the new minimum standard.
Landlords will need to have in place an EPC which meets the minimum E rating in order to grant a new tenancy. This includes tenancies to both new and existing tenants, so lease renewals, lease extensions and sub-lettings (the immediate landlord will become responsible) will all be caught.
Importantly, where tenants have the right to renew their lease under Part 2 of the Landlord and Tenant Act 1954, landlords will not be able to refuse the renewal on the basis that the EPC rating for the property is sub-standard – they will simply have to rectify the issues.
There are other potential implications for landlords too, such as the effect that sub-standard EPC ratings may have on property valuations. There may also be implications for open market rent reviews – if the property cannot be let lawfully, what will be used as a comparable property?
Or can we ‘read into’ the rent review provisions in the lease that they will assume a comparable property must meet the minimum rating?
Action for landlords
If they have not already done so, landlords would be well advised to investigate the EPC ratings of their existing estate as soon as possible. For those properties which do fall below the minimum EPC rating, the options must be weighed up carefully.
Landlords may wish to carry out improvements to the property now to bring the EPC rating up to scratch. The issues may be simple to rectify, particularly if the original EPC rating did not fall far below an E rating. But equally, improvements could be time consuming and expensive – a lot will depend on the age and nature of the building. Owners of pubs (often older buildings) may have a more arduous task on their hands than other commercial landlords.
Alternatively, where EPC ratings fall below the minimum standard, Landlords may wish to organise the surrender and re-grant of existing leases before April 2018. Even where a tenant requires financial incentive to pursue this option, it may still be the preferred option for the landlord if the building improvements required to bring the EPC rating up to scratch are particularly costly.
It is important, where improvements are required, landlords should check the existing lease to see who is responsible for carrying out improvements required under statute – it could be the tenant.
When carrying out improvements, landlords should ensure that they take advantage of tax reliefs available under the Enhanced Capital Allowances scheme for investing in energy efficient equipment. Landlords could claim 100% first year tax relief if they purchase items which are listed on the government’s Energy Technology Product List.
Crucially, if a property is let in breach of the Regulations the lease itself will remain valid and in force.
However, the penalties for letting a property in breach of the Regulations can be costly, particularly across a large estate. For properties let in breach of the Regulations for less than three months, there will be a penalty equivalent to 10% of the property’s open market rental value – subject to the penalty being a minimum of £5000 and a maximum of £50,000.
If the property is let for more than three months, this rises to a penalty of 10% of the property’s open market rental value – subject to a minimum of £10,000 and a maximum of £100,000.
The changes do not stop there. From April 2023 it will be unlawful for landlords to continue to let a property which falls below the minimum EPC rating of E (no new tenancy will be required), unless one of the above exemptions applies. It seems then, that there will be no quick fix for landlords to the issue of poor EPC ratings.
There is also no guarantee as to how long the minimum EPC rating of E will remain in place. The goalpost will inevitably be moved in the future and we do not know when.
The Regulations themselves stemmed from EU legislation and although Brexit brings a level of uncertainty, there is no indication that the government will back away from this commitment.
On the contrary, as energy efficiency climbs higher on the social and legislative agenda, it is important for landlords to consider the best solutions now, for the long term.
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The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.