Energy efficiency – the new regime

On 1 April 2016 the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 will come into force. They introduce a minimum energy efficiency standard for all property as part of the Government’s initiative to meet European sustainability and efficiency targets. Landlords of commercial properties will have until 1 April 2018 to ensure they meet these requirements so should start planning necessary improvements now as the obligation is on them to comply with the regulations. Even though the first deadline is over two years away, many existing leases, or those being renewed or granted now, will last beyond April 2018 and even 2023.

The Government estimates that nearly 20% of privately rented commercial properties have an energy efficiency rating of E or below. From April 2018, commercial properties with an F or G energy performance rating that are being let will have to improve their energy efficiency. From 2023 all commercial properties will be affected, whether or not new leases are being granted. Not complying with the new regulations could incur a hefty fine of up to £150,000.

Scope

From 1 April 2018 when the new rules come in to force, landlords will be committing a criminal offence if they grant or renew a lease of a property with an energy performance certificate rating lower than E, although not all commercial properties are affected.

If you are leasing to new tenants for a term of less than six months or more than 99 years, the new rules don’t apply. Although buying and selling commercial properties will not be affected, their marketability could be diminished if they don’t meet the energy efficiency standards, as could a lender’s willingness to lend against such properties.

Exemptions

There are a few exemptions written into the regulations. These exemptions only last for five years and must be registered. To qualify for an exemption, a landlord must demonstrate

• the work required to achieve at least an E energy efficiency rating will not pay for itself over a seven year period
• the work will lower the property’s capital or rental value by more than 5%
• a third party has prevented the works from taking place by refusing consent
• they have been forced into a new letting, for example due to a prior option or other contractual obligation.

Action

If a landlord does not have a valid Energy Performance Certificate for their building, they will need to commission one to establish its efficiency rating. For F or G rated buildings, a landlord will need to review what work is required to bring the building up to an E rating. The landlord will then need to establish whether they have all necessary rights of access and rights to carry out any work under the terms of any existing lease.

Future

It should be kept in mind that the minimum energy efficiency rating will be reviewed again by the Government in the future and landlords are likely to be forced to comply with a higher rating. The wording of any leases must be drafted so that the landlord is able to pass on all or some of the costs of these works to his tenants.