Minimum energy efficiency levels for letting non-domestic property in April 2018

Energy Performance Certificates (EPCs) contain an efficiency rating for the relevant building from A (the most efficient) to G (the least). Section 49 Energy Act 2011 will make it unlawful for a landlord to lease a non-domestic property which has a rating of F or G. The section with accompanying regulations is due to come into force on 1 April 2018. The Department of Energy and Climate Change has therefore published in July 2014 a consultation paper Private Rented Sector Minimum Energy Efficiency Standard Regulations (Non-Domestic) (England and Wales). It clarifies the Government’s intentions and helps the property industry plan for the change.

The consultation paper

The main proposals are:

Link to energy performance certificates
The minimum efficiency level will be an E rating as shown on an EPC so F and G properties will be in default. Landlords of F/G properties will be able to market them. However, the prospective tenant and landlord of such a property must agree on proposals to improve efficiency levels. These must be carried out before a lease is granted.

Works required to comply
Generally improving a property so it has a rating of E will be compliance. However, there will properties where the landlord carries out the works as required by the regulations but the property’s rating remains below E. In such instances the landlord can let the property. This is where the landlord has done all works which satisfy the “Golden Rule” under the government’s Green Deal. The rule “is that repayments [of the Green Deal loan] for improvements … must be the same or less than expected energy bill savings (in the first year)” .

Having identified works which qualify under the Golden Rule, the landlord is free to finance them other than by a Green Deal loan if it wishes.

Start date
The regulations will apply to new lettings granted on or after 1 April 2018. There will be a backstop date whereby lettings pre-dating the 1 April 2018 will become subject to the regulations. The proposed backstop will be 1st April 2023. This was one of the big unanswered questions prior to the consultation paper – would we get a “hard start” whereby existing lettings of F/G properties would overnight become unlawful on 1st April 2018?

Lettings exempt from the scheme
These include:

1. The regulations will only apply to buildings where there is an EPC. There may be lettings in place before the introduction of EPCs in 2007 which therefore escape the regulations.
2. Where EPC regulations exempt landlords from providing an EPC, the minimum efficiency regulations will contain the same exemptions e.g. a short term letting of a building prior to its demolition.
3. Lettings under six months subject to a maximum of two such lettings to the same tenant.
4. Leases where the length is more than 99 years.
5. Lettings where the landlord cannot obtain the necessary consents for the efficiency works. Necessary consents can include: planning or building regulation approval; consents from lenders or superior landlords; a consent from a sitting tenant to allow the landlord access to do the works.
6. Where the works cause a material net decrease in the property’s capital value.
7. Where the property does not qualify for any works which satisfy the Golden Rule under the Green Deal. This is subject to the landlord obtaining three Green Deal assessments which show this.

Some of these exemptions will be temporary and come with a great deal of bureaucracy and paperwork. A five year period is proposed after which the exemption ends unless the landlord can again establish the conditions for claiming the exemption.

Other matters

In addition to the above, the consultation paper discusses topics such as the enforcement regime and a proposal for increasing the starting point at some time in the future for compliance e.g. making compliance begin with an asset rating of D rather than E. There is no exemption for listed buildings. In addition, the government is considering bringing lease renewals within the scheme even though these do not require an EPC.

What next?

The timetable is short: the consultation period ends in early September and the intention is to have the regulations in place early next year. This suggests the Government is unlikely to be persuaded to change much in its proposals by the responses it receives to its consultation paper.