The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (Regulations) establish a minimum level of energy efficiency that applies to both private rented residential and non-domestic property. The minimum standards are being introduced in a phased manner commencing from 1 April 2018.
Below, we have put together some of the key points for consideration by landlords in relation to the Regulations.
What is an Energy Performance Certificate?
An Energy Performance Certificate (EPC) sets out the energy efficiency rating of a property and contains recommendations that will improve its energy efficiency. The rating fits within a lettered band with A being the most energy efficient and G being the least energy efficient.
Minimum Energy Efficiency Standard (MEES)
The new minimum level of energy efficiency (Minimum Energy Efficiency Standard) is E and above and is aimed at encouraging landlords and property owners to improve the energy efficiency of their properties by placing a restriction on the granting of and the continuation of existing tenancies where the property has an EPC rating of F and G. The properties that do not reach the minimum level of energy efficiency are dubbed a “Sub-Standard Property”.
From 1 April 2018, landlords of privately rented domestic and non-domestic property must ensure that their properties reach at least an EPC rating of E before granting a new tenancy (or extension) to new or existing tenants. From 1 April 2020 for domestic properties and from 1 April 2023 for non-domestic properties, Landlords must not continue to let a property regardless of when the tenancy or lease was granted if that property is a Sub-Standard Property. This is subject to limited exemptions.
Exemptions from the Minimum Energy Efficiency Standard
In certain limited circumstances, landlords may be able to claim an exemption from the prohibition on letting a Sub-Standard Property. Where a valid exemption applies, landlords must register the exemption on the Private Rented Sector Exemptions Register. Exemptions are made on a self-certification basis but are monitored by the local weights and measures authority in each area. Key exemptions include:
- Third-party consent: a five year exemption can be given where despite reasonable efforts (which a landlord is required to undertake under the Regulations), necessary third-party consents from persons such as a superior landlord, a mortgagee, a tenant or planning consent to carry out the energy efficiency improvements cannot be obtained or, the conditions imposed by that consent cannot reasonably be complied with. Where the consent of the tenant cannot be obtained, the exemption will only continue whilst that tenant remains a tenant;
- Devaluation: a five year exemption can be given where an independent RICS surveyor has advised that the energy efficiency measures proposed would reduce the market value of the property by more than 5%;
- Relevant improvements: where a landlord has installed all relevant improvements and the property remains below the minimum level of energy efficiency, a landlord is permitted to continue letting a Sub-Standard Property. An obligation on a landlord to make improvements to a non-domestic property is limited to ‘relevant energy efficiency improvements’ only which is the measure (or measures) that meet the ‘payback test’. Where improvements would not pay for themselves through energy savings within seven years, the landlord is not required to undertake the improvements. There is also a special exemption provision relating to cavity wall insulation where an expert determines that the measure would negatively impact the fabric or structure of the property; and
- Suddenly becoming a landlord: the Regulations acknowledge that in limited circumstances, a person may have become a landlord suddenly and it would therefore be inappropriate or unreasonable for them to comply with the Regulations immediately. If a person becomes a landlord in any of the specific circumstances set out in Regulation 33(2), a temporary exemption, lasting for six months will apply from the date they become the landlord.
There are also circumstances where the MEES does not apply, these include:
- Properties that are held by registered housing providers or by the public sector and let out as affordable housing;
- Tenancies of less than six months or tenancies over 99 years;
- Properties where an EPC is not legally required; and
- Properties where the EPC has expired but there has not yet been a trigger requiring a new EPC (i.e. a sale or letting of the property).
What should landlords of non-domestic properties be considering?
The most significant threat to landlords in respect of the MEES is the financial cost of upgrading a Sub-Standard Property and the potential loss of income whilst a Sub-Standard Property is unable to be rented to a tenant. Unlike domestic property there are no third-party funding resources available for improvements and so any improvements will be need to be funded by the landlord or tenant.
The terms of an existing lease will determine who bears the liability for the energy efficiency improvements. The terms of an existing lease relating to service charges, yielding up, statutory compliance and rent review may not enable a landlord to recover the cost of the required improvements. A landlord’s right of entry may also not extend to installing energy efficiency improvements.
Landlords should also note that that the Regulations do not interfere with a tenant’s rights under other regulations such as the Landlord and Tenant Act 1954. A landlord cannot refuse consent to a lease renewal on the basis that the property is a Sub-Standard Property. However, where a lease has been granted under Part 2 of the Landlord and Tenant Act 1954, this is one of the circumstances where the exemption of ‘suddenly becoming a landlord’ can apply.
Landlords acquiring a Sub-Standard Property who intend to continue to let the property once it has been acquired also need to bear in mind that exemptions that have been claimed do not pass to a new owner or landlord upon sale or other transfer. Upon transfer of the property, the exemptions will cease to be effective and the new owner will either need to achieve the minimum energy efficiency level or register an exemption if one applies.
Landlords can ensure that they are prepared for the immediate, medium term and long term implications of the Regulations by considering the following:
- Checking the EPC ratings of properties within their portfolios and taking note of their expiry;
- Determining which properties, if any, are within the scope of the Regulations and whether any exemptions may apply;
- Reviewing the terms of existing leases to understand who may be responsible for any necessary energy efficiency improvements and each party’s rights within the lease. Although a lease will usually impose an obligation on a tenant to comply with all laws, the MEES is a compliance matter for a landlord and not a tenant; and
- If a tenant wishes to undertake fit out works, ensuring that the proposed works will not adversely affect the EPC rating of the property and considering imposing obligations in leases on a tenant to maintain the EPC rating.
The Department for Business, Energy & Industrial Strategy has published useful guidance.
For more information please contact our Commercial Property Team.