This guide was last updated in August 2015
Regulations have now been passed making it unlawful to grant new leases of energy inefficient commercial or domestic properties in England and Wales after 1 April 2018. The regulations do not apply to sales. Scotland has its own legislation which will restrict both the sale and letting of energy inefficient commercial properties, possibly from June 2016.
These provisions are among the most fundamental pieces of legislation to affect the future rental potential of UK properties. This guide addresses the legal position in England and Wales, Scotland and Northern Ireland.
Regulation in England and Wales
The 2015 Energy Efficiency Regulations, passed in March 2015, set out minimum energy efficiency standards (MEES) for England and Wales. These regulations make it unlawful for landlords to grant a new lease of properties that have an energy performance certificate (EPC) rating below E, from 1 April 2018. The regulations do not affect sales. They apply to both commercial and domestic rented properties, with some exceptions:
- the landlord has made specific energy efficiency improvements that are cost effective, in that they involve no up-front cost either because the cost of the works satisfies the 'golden rule' in a Green Deal plan or they are cost effective over a seven-year payback period;
- the work needed to bring the property up to an 'E' rating would result in more than a 5% reduction in the value of the property; or
- third-party consent for the work cannot be obtained.
Some lettings will not trigger an obligation to carry out works, namely:
- for commercial properties: short-term lettings under six months; leases of more than 99 years;
- for domestic properties: lettings that are not assured or regulated tenancies; lettings by public landlords such as government departments, local authorities and housing associations.
The regulations also capture lease renewals.
The requirements are compounded by changes to the Building Regulations that came into force on 6 April 2014 which mean that properties that have already been assessed for an EPC may well be given a lower asset rating if a new EPC is triggered and the property is reassessed. As a result, a property that currently has a rating of E could be downgraded to an F; taking it into the category where a new lease cannot be granted after April 2018 unless specific energy efficiency improvements are made first or another exemption applies.
Of even greater significance is an additional requirement that landlords will not be permitted to continue to let a property with an EPC asset rating of below E unless specific energy efficiency measures have been carried out first or one of the other exemptions applies. This requirement will come into force from April 2023 for commercial property, and from April 2020 for domestic properties.
Regulation in Scotland
Forthcoming regulations under the 2009 Climate Change (Scotland) Act will provide for improvements to the energy efficiency of non-domestic buildings in Scotland over 1,000 sq m that do not meet 2002 building standards.
The trigger for improvement works to take place will be when the owners wish to sell or lease the property once the regulations come into force, which is anticipated to take place in June 2016. The regulations will not apply to lease renewals.
When either event occurs, the property owner will be required to provide the purchaser or tenant with an action on carbon and energy performance (ACEP), made up of an EPC and an 'action plan'. The action plan will set out how the energy performance of the building could be improved and greenhouse has emissions reduced. The purchaser or landlord will then have the option of either carrying out the works specified in the action plan within a set period of time - currently suggested as 3.5 years - or recording the energy usage of the property over a period of time, with a view to reducing the energy consumption.
Energy efficiency measures are also due to be introduced for domestic property, although this is still at the consultation stage.
The onus will be on landlords to ensure compliance. The Scottish Government is currently grappling with the landlord/tenant issues which arise.
As in England and Wales, the implementing regulations are expected to exempt premises in respect of which there is a Green Deal plan. It is also worth noting that, while EPCs play an important role in both regimes, in Scotland the basis for assessment of EPC ratings is different from that in England and Wales. This can lead to different ratings for otherwise identical buildings. However, it is anticipated that this will be regularised in time.
The position in Northern Ireland
Northern Ireland does not yet have an equivalent of the Energy Act or the Climate Change (Scotland) Act. 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.
Review your property portfolio now
The combination of environmental costs and the threat to the rental potential for properties makes it essential that property investors and developers, and their funders, understand the intricacies of this area of regulation. They should review their property portfolios now to identify properties with energy efficiency asset ratings of F and G, which will be unmarketable beyond 2018; and consider a strategy for carrying out energy efficiency improvements.