Energy Performance Certificates (EPCs) assess the energy performance of buildings. The certificate grades the energy efficiency of a building on a scale from A (the most efficient) to G (the least efficient). An EPC is valid for 10 years after being issued and includes recommendations on improving the energy efficiency of a building and the rating achievable.
Section 49 of the Energy Act 2011 made it unlawful for a landlord to lease a non-domestic property which “falls below such level of energy efficiency (as demonstrated by the energy performance certificate) as is provided for by the regulations”. The relevant regulations, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations), were made on 26th March 2015 and have set the required level of energy efficiency, as well as deadlines for meeting the required level, as follows: –
- After 1st April 2018, it will be a criminal offence for landlords to grant new leases (including renewals and extensions of leases to existing tenants) of properties that fall below a minimum “E” rating; and
- After 1st April 2023, landlords will be in breach of the MEES Regulations if they continue to let, under existing leases, properties that fall below the minimum “E” rating.
While the MEES Regulations act as a fierce warning to landlords on their responsibilities regarding energy efficiency, the following key points should be noted: –
- The MEES Regulations only apply to landlords of tenanted properties – this can include tenants who sublet, but could exclude properties occupied under a licence (i.e. a non-exclusive occupation of the property).
- The MEES Regulations only apply to properties that need to have an EPC, which would include: –
- Properties which have not been transacted since EPCs were introduced in April 2008 (i.e. the last lease of the property was granted before April 2008). Before April 2008 there would have been no obligation to have commissioned an energy assessment for an EPC and so no requirement for the landlord to produce one to a potential tenant.
- Other properties that do not currently need to have EPCs, including places of worship, many listed buildings, those that are not heated or ventilated using power, buildings below a certain size, buildings that people do not ordinarily visit, buildings scheduled for demolition, industrial workshops with “low energy demand” and most agricultural buildings.
- The MEES Regulations do not apply to: –
(a) tenancies granted for 99 years or more; or
(b) a tenancy granted for a term less than six months, but only where: –
- there is not a provision for renewing or extending the term beyond six months; and
- the tenant has not already been in occupation for a continuous period of over 12 months.
However, if the landlord can demonstrate that the property falls within one of the below exemptions, it will not be required to produce an upgraded EPC. These exemptions are: –
- If all “relevant energy efficiency improvements” have been made to the property, or no such improvements can be made to it. The improvements that qualify as “relevant” are listed in the Schedule to the Green Deal (Qualifying Energy Improvements) Order 2012 and Table 6 of the Building Regulations Approved Document L2B. As a consequence, the landlord must demonstrate: –
- that there are no “relevant energy efficiency improvements” that can be made; or
- that all available “relevant energy efficiency improvements” have been undertaken but the property still falls below an ‘E’ rating.
The landlord can benefit from this exemption provided that it is registered on the Private Rented Sector (PRS) Exemptions Register. However, the benefit can only last for a period of 5 years from registration at which time the position has to be reassessed.
- In the preceding 5 years, the landlord has been unable to improve the energy performance indicator of the property to “E” or above due to the lack of consent from a tenant or third party (for example, planning consent, the consent of a superior landlord, listed building consent, etc). Again, this must be registered on the PRS Exemptions Register and will only last for 5 years.
- In the preceding 5 years, an independent surveyor has advised that a particular improvement would reduce the market value of the property by more than 5%. Again, the exemption will only be valid for 5 years and, in order to take advantage of it, a copy of the independent surveyor’s report will need to be registered on the PRS Exemptions Register.
- Where an entity becomes a landlord in the following circumstances: –
- the landlord is under a contractual obligation to grant the lease (i.e. an option to renew is contained in the lease);
- a lease is granted by operation of law (e.g. because of a deemed surrender and re-grant);
- an overriding lease is granted pursuant to the Landlord and Tenant (Covenants) Act 1995;
- a lease renewal is granted pursuant to Part 2 of the Landlord and Tenant Act 1954;
- a lease is ordered by the court; or
- the letting prohibition is postponed for six months.
Once the exemptions expire, the landlord will need to carry out the improvements necessary to get an ‘E’ rating, or again demonstrate and register an applicable exemption in order to let – or continue to let – the property.
Penalties for breach of the MEES Regulations differ depending on the duration of the breach and the rateable value of the property, subject to specified minimum and maximum amounts, as follows: –
- If the “penalty notice” is served when the landlord has been in breach for less than 3 months, the financial penalty cannot exceed the greater of: –
- £5,000; and
- 10% of the rateable value of the property, subject to an absolute limit of £50,000.
- If the breach has been continuing for 3 months or more, the financial penalty cannot exceed the greater of: –
- £10,000; and
- 20%, of the rateable value of the property, subject to an absolute limit of £150,000.
What does this mean?
While it is still some time away from April 2018 and 2023, the MEES Regulations should be considered now, particularly if leases are granted with a term of more than 7 years.
Although compliance will be the responsibility of the landlord and not the tenant, this responsibility could be passed down to a tenant if the tenant agreed to accept the obligation. For example, in such circumstances, the tenant could be made to improve the property and indemnify the landlord for any penalty notices.
If the landlord cannot claim an exemption, landlords have from now until 31st March 2018, or possibly until 31st March 2023, to bring a sub-standard property up to the required standard. If there is an existing lease, the landlord can either attempt to pass the liability or cost down to their tenant (possibly through a service charge) if their lease allows them to do so, or to meet the cost themselves. In either case, the landlord will need to check their leases to ascertain whether they need the tenant’s consent to carry out the necessary improvement works, and whether they have the right to enter the property to carry out the works. However, the tenant may not welcome such a provision, as it may cause disruption to its enjoyment of the property, and may, instead, prefer to limit the period during which the landlord can enter the property to carry out any necessary works.
If you would like to discuss any aspect of Energy Performance Certificates, then please give us a call on 0116 289 7000.