The clock is ticking for commercial property landlords who fail to improve the energy efficiency of their properties by 1 April next year. Miss the deadline and landlords may be unable to let their less energy efficient properties, while penalties of up to £150,000 exist for breaches of the new regulations.
“The Minimum Energy Efficiency Standards Regulations come into force on 1 April 2018 and prudent landlords should be preparing for the change now,” advises commercial property specialist Liz Brady, a Partner at leading South East law firm Furley Page.
Liz explains that under the new regulations, subject to a few exceptions, private sector landlords of properties will not be able to grant new leases of properties to new or existing tenants with an Energy Performance Certificate (EPC) band rating of F or G. These account for about 18% of non-domestic properties according to Government statistics.
“EPCs last for 10 years and were first carried out in 2008. Those early EPCs are due for renewal on new lettings in 2018. Landlords may well consider that they are ‘safe’ from the penalties of the new regulations as their early EPCs showed a band rating of D or E so they may expect any renewed EPC to be similar, provided no negative alterations to the building have been made in the intervening years.
“This may be so but properties with original band ratings of D or E (accounting for about 47% of all such properties) are at risk. The EPC rating could fall to bands F or G on a new inspection as the software used for assessment has increased in its accuracy, and the Building Regulations on efficiency have become more rigorous.
“Because of this risk, some prudent landlords are actively reviewing their property portfolios and having energy assessments carried out now (but not necessarily registered) and where improved ratings are needed, they are carrying out the works to improve the energy efficiency of their properties and hence those ratings and then having them reassessed,” says Liz.
Landlords are also inserting covenants in their new leases imposing obligations on the tenant not to do anything to diminish the EPC ratings of the properties. Landlords cannot try to impose the liability on tenants under the general provisions already standard in leases and recover costs via a service charge (justified as improvements required under legislation) as the regulations do not impose any positive obligations on the landlord to improve the energy efficiency of buildings; the regulations just prohibit certain properties being let.
Liz adds: “Some sceptical landlords may consider that Brexit will save the day but this is not the case. The Government recently published guidelines clarifying these regulations and enforcement procedures showing its commitment to improved energy efficiency. The penalty for breach is a maximum £150,000 depending on rateable value of the property.
“The important thing is to be prepared. As a landlord, if you are unable to let your property as the EPC band rating is too low, it may take months to rectify the position by making alterations or additions to the property to improve its EPC band rating. If the property cannot be let during the time, income from the property will be lost and until the works are carried out the investment value of the freehold will be detrimentally affected.
“One last point to note for the future: the part of the regulations taking effect after April 2023 will apply to existing lettings too. Any new or existing letting (subject to a few exceptions) of a building with an EPC banding of F or G will be in breach of the regulations,” says Liz.
Government guidance is available at https://www.gov.uk/government/publications/the-non-domestic-private-rented-property-minimum-standard-landlord-guidance
Liz Brady has extensive experience of advising clients on a range of commercial property transactions involving international companies, Kent retail chains, developers, higher educational establishments and local authorities. She is a member of the Commercial Real Estate Legal Association and the Kent Law Society.
For more information and advice on commercial property issues contact Liz Brady by email at firstname.lastname@example.org call 01227 763939.
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