From April 2018 the Energy Act 2011 will make it unlawful to lease or renew leases to tenants of commercial property with an EPC Rating of F or G – the lowest two bands of energy efficiency. However landlords will not be required to improve the energy efficiency of their building if the improvement works are not permissible, appropriate or cost effective. To be considered cost effective any measures carried out must pay for themselves through the resulting energy savings. Further a landlord is exempt if a tenant or third party consent is required for the works and such consent is refused or the works would actually reduce the value of the property by 5% or more.
Penalties for breaching the regulations are expensive. If the breach was for less than 3 months at the time of the service of the penalty notice the fine is an amount equal to the greater of £5,000 or 10% of the rateable value of the property, subject to a maximum fine of £50,000. If the breach was for a period longer than 3 months the fine increases to the greater of £10,000 or 20% of the rateable value subject to a maximum penalty of £150,000.
Certain types of leases will be exempt from the regulations. For example leases of 6 months or less (unless the tenant has occupied the property for more than 1 year), leases over 99 years and any properties that are exempt from EPC requirements.
There are a number of implications for landlords, particularly for those holding older, less energy efficient, stock. As it will be illegal to market some properties in April 2018, unless they are upgraded to meet minimum standards, there is a potential cost implication for landlords with vacant property in their portfolio in 2018. Although there is an exemption if the works will not be cost effective, a landlord must spend time and money investigating the ways in which the property could be more efficient, the associated costs and produce documentation to demonstrate that the cost of the works would not satisfy the ‘Green Deal’ golden rule. However if the works are cost effective we believe that the works will be required even if they do not bring the property up to an E rating.
The reduced marketability of the properties with an F or a G rating could affect their value. Potential purchasers may be deterred from acquiring a property for which work is needed or the costs of carrying out improvement works will be reflected in the purchase price. We envisage that this will become more prevalent in the investment market over the forthcoming 1 -2 years. Rent reviews may also be affected with a more energy efficient property having a higher rental value attributable to it than a less efficient property and this in turn may affect the overall performance of a portfolio. Within the leasehold market tenants may start to move towards more energy efficient properties which will have an impact on the achievable rent for more inefficient properties.
What should you being doing?
- Where your property has a current EPC review the rating and take note of those that fall below the E rating. Energy performance certificates for non-domestic property can be found at https://www.ndepcregister.com/. Some types of property will be exempt.
- Where a property has an F or G rating review the recommendation report and see what works are required to improve the efficiency of the property.
- Working with your surveyor and a qualified energy assessor cost the works required against the savings to be made in energy efficiency. This is with a view to being able to demonstrate that the works are not cost effective or ensuring that any works carried out to the property contribute the maximum amount of ‘points’ to the rating for the minimum amount of expenditure. For example some items may be expensive to carry out but contribute little in terms of energy savings. There may be some cheap quick fixes.
- Forward planning is essential. For example it would be unwise to carry out a full scale refurbishment of a property now and not ensure that any works carried out contribute to the energy efficiency of a building. Or if you have a large portfolio of older stock put in place a rolling programme to carry out works over the next 3 year period to avoid all costs falling due in one block.
- Tenants should not assume that their landlord will pick up the costs of the work. The lease may contain a statutory compliance covenant which will oblige the tenant to carry out improvements so that the premises comply with regulations. Check existing lease provisions.
For more information or to discuss this further please contact a member of the commercial team.