How changes to EPC regulations in 2018 will affect your properties
In order to achieve the UK’s legislative targets, CO2 emissions from all buildings must be ‘close to zero’ by 2050. This implies, in the longer term, UK buildings will need to reach energy efficiency standards close to an “A” Energy Performance Certificate (EPC) rating. In 2013, 18% of non-domestic properties were in the very lowest of EPC bands and were rated F and G. From 1 April 2018 new regulations will come into force in England and Wales which will impact on rented commercial buildings having a knock on effect on all players within the commercial property market. But how exactly will this impact on you?
Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 brought into force minimum energy efficiency standards (MEES) for residential and commercial properties. As of 1st April 2018 landlords of buildings within the scope of the MEES Regulations must not renew existing tenancies or grant new tenancies if the building has less than the minimum EPC rating of E unless they fall into one of the exempted categories. Landlords with properties with an EPC rating of less than “E” will have to carry out works to improve the energy performance of the building to a rating of “E” or above or face civil penalties (set out below).
As of 1 April 2023, landlords must not continue to let any buildings which have an EPC rating of less than E unless they are exempted.
Who do MEES apply to?
Save as set out below, MEES Regulations apply to all properties requiring an EPC including all residential tenancies let under assured tenancies, assured shorthold tenancies, Rent Act tenancies and any other tenancy specified by an order of the Secretary of State from time to time.
The MEES Regulations will not apply to the following:
1. Buildings which are not required to have an EPC such as industrials sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holiday lets;
2. Buildings where the EPC is over 10 years old or where there is no EPC;
3. Tenancies of less than 6 months.
4. Tenancies of over 99 years.
What are the exemptions?
There are several exemptions from compliance and therefore allow a property to be legally let with an EPC rating below “E”:
1. Where third party consent is denied- where consent from person such as a tenant, a superior landlord or planning authorities is refused or has been given with conditions with which the landlord cannot reasonably comply;
2. If energy efficiency improvements would negatively impact the value of the property or:
3. If all improvements possible at no upfront costs to the landlord have been undertaken but the rating is still below an “E”.
In all instances, the exemptions are only valid for five years and cannot be transferred to a new landlord. Also, all exemptions must be registered on the central government PRS Exemptions Register.
Penalties for Non-Compliance
Local Weights and Measures Authorities (LWMAs) will enforce the new regulations and will have powers to impose civil penalties determined by the property’s rateable value. If a let property is found to be in breach of the MEES Regulations and a penalty is imposed, the lease between the landlord and the tenant remains valid and in force.
Where the breach is for less than three months, the fine will be the equivalent of 10 per cent of the rateable value of commercial properties, subject to a minimum penalty of £5,000 and a maximum of £50,000 and £2,000 for residential properties.
Where the breach is for more than three months, the fine will be the equivalent of 20 per cent of the rateable value for commercial properties subject to a minimum penalty of £10,000 and a maximum of £150,000 and £4,000 for residential properties.
If a Landlord breaches the MEES Regulations, the breach will be published on the exemptions register for a minimum of 12 months.
What can you do now?
As a landlord you will be financially out of pocket for the cost of upgrading non-compliant buildings and may be faced with a potential loss of income if the property cannot be rented out. Consideration will need to be given to provisions in existing leases as they may affect the statutory obligations of landlords under the MEES Regulations and how you as landlord can deal with any adverse existing provisions.
However, the MEES Regulations encourage landlords and tenants to enter into more environmentally friendly leases which could ultimately result in lower running costs for the buildings benefiting all parties involved. Improving the energy efficiency of a building will make the building more attractive to potential renters which could provide scope for charging higher rents.
With time currently on their side, landlords should be looking at their property portfolios now to determine which properties may be affected by the MEES Regulation and whether any exemptions may apply. On top of this, landlords should also be considering incorporating energy efficient changes in existing planned maintenance in their properties and whether any additional costs can be passed on to tenants. With regards to new leases being granted, landlords may wish to expressly exclude a requirement for them to grant consent to alterations if the alterations would diminish the EPC rating of the property.
The Position in Northern Ireland
Northern Ireland does not yet have an equivalent of the Energy Act 2011. However there is a draft Climate Change Bill, and the Northern Ireland Executive’s Programme for Government contains a target to reduce greenhouse gas emissions by at least 35% by 2025 compared to 1990 levels. As a result, although there are no current proposals for MEES on sales or lettings, investors, developers and funders should keep the progress of the Bill under review.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.