There has been concern for some years that a low EPC rating may prevent a commercial property in England and Wales from being let in the future. We now have the detail of the government's plans.
Last year the government consulted on its proposals for a minimum energy efficiency standard for lettings of both commercial and domestic properties. This February it issued its response to that consultation and draft regulations.
The minimum standard for letting a commercial property will be an E rating in an EPC - the same standard will apply to domestic properties. It will be applied from 1 April 2018 to the grant of a new lease, including a lease renewal.
This means that if a commercial property has an F or G rating and is to be let after 1 April 2018, the landlord will have to comply with the regulations or risk a hefty fine.
Costing the works
Last summer the government said in its consultation that a landlord would only be required to make improvements to a building with an F or G rating if they involved no upfront cost, such as through green deal finance.
That position has changed. A landlord will have to carry out any energy saving measures that effectively pay for themselves through savings in energy bills within seven years. Only measures that fall outside that bracket will be covered by an exemption.
Given that the tenant will often be paying the energy bills and so will benefit from the savings, the landlord will have to assess how it will recoup the upfront cost, if at all - and on multi-let buildings whether the cost may be recoverable through the service charge.
Government guidance might explain what a landlord can do if it cannot afford this upfront cost. Guidance is needed as currently there are no plans to make green deal finance available in the non-domestic sector.
Other points to note include:
- the minimum standard of E will be applied from 1 April 2023 to all let properties, including where a lease is already in place and a property is occupied by a tenant
- the minimum standard will not apply to leases of six months or less (provided the tenant has not been in occupation for 12 months), leases of 99 years or more and leases of properties that are excluded from the requirement to have an EPC (such as a property to be demolished)
- sub-lettings are caught by the requirement - the government acknowledges that tenants are likely to require their landlords' consent for any alterations or improvements, and so may be able to claim an exemption where that consent is not forthcoming.
A landlord will be able to claim an exemption in some circumstances, but the landlord must notify the exemption on a centralised online register and lodge evidence to prove the exemption before the letting goes ahead.
For lease renewals a landlord will have six months to comply with the regulations or register an exemption.
An important exemption for landlords is that, despite making reasonable endeavours, it cannot obtain necessary consents from tenants, lenders, superior landlords or planning authorities. It will need to lodge evidence on the centralised register of the application for consent and refusal.
An investment landlord who buys a let property with an F or G rating will not inherit exemptions from the previous landlord. Instead it will be given six months to comply with the regulations. If, for example, the previous landlord had an exemption that the tenant refused consent to energy efficiency measures being carried out, the new landlord will have to try again to obtain the tenant's consent.
Exemptions will last for five years - on expiry of an exemption, a landlord will either need to achieve the minimum standard of E for its property or obtain another exemption.
Non-compliance with the regulations will not affect the validity of a lease but it will expose the landlord to the risk of substantial penalties. Renting out a non-compliant property will result in penalties of between £5,000 and £150,000, depending on the length of non-compliance and rateable value of the property. There is also a penalty of £5,000 for providing false or misleading information to the exemptions register.
It is unclear at this stage how the new regulations will work in practice and government guidance will be essential. There is also the possibility of a change of government and ensuing shifts in policy.