Energy Efficient, Environmentally Friendly but also an unwelcomed Expense?

New Energy Efficiency Regulations have been passed this year in an attempt to meet parliamentary targets to reduce greenhouse gas emissions, and here Colin Winyard, Commercial Property Solicitor, advises landlords of privately rented commercial properties to familiarise themselves with these rules as they are likely to have a significant impact on their properties as well as the tenants who occupy them.

The Energy Act 2011 brought in minimum energy efficiency standards (“MEES”) and required the government to set minimum standards for domestic and commercial privately rented property. Parliament has now passed the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 which mean that from 1 April 2018, any property subject to lease renewal or new letting must have an EPC rating no lower than band E (with A being awarded to a very high energy efficient building, and E being the new minimum for the lowest energy efficiency). It has been estimated that 18% of commercial buildings are currently rated F or G and would therefore be caught by the regulations and prevented from being let or re-let until improvements are made. From 1 April 2023 the regulations will also apply to those commercial properties subject to current leases.

As these dates are either two or ten years away landlords may be tempted to hesitate in implementing any necessary improvements. In order to minimise risk however, it is important for landlords with property portfolios to begin to determine which of their properties (if any) might not come up to the standard and consider when they should be doing any required works.

After a time of uncertainty for landlords as to where the limit would be set for the minimum rating, they now have clarity and are able to proceed with the necessary works, the liability for which ultimately lies with them. It is their responsibility to ensure that their properties are compliant, even though in some cases tenants may be obliged to share the costs. In the event of non-compliance, penalties may only be imposed on the landlord.

A property with an EPC rating lower than the new minimum E standard cannot be rented nor an existing lease renewed until it has been brought up to that standard. The lawful renting of these properties will therefore be impossible until the property is upgraded. It is clear that the regulations impose increased expenses on landlords and if they wait until the premises are unoccupied they will have no opportunity to share the cost of improvements with a tenant. As it is possible that the government might increase the levels of required efficiency even further, landlords might wish to consider bringing their properties up to a level higher than the new minimum.

The regulations include some exemptions which, if applicable, would cause a property to fall outside the scope of the regulations. In practice these exemptions will be quite limited:-

• Not cost effective – this exemption applies where the cost for installing improvements would exceed the annual energy savings.
• No consent – if the landlord, after reasonable efforts, has been denied consent from parties such as a superior landlord, the freehold owner, the tenant or as a result of the property being listed.
• Decrease in value – the property will be exempt where a suitably qualified independent surveyor has determined that the necessary improvements would result in a decrease in value of the property by more than 5%.
• Properties let by the landlord on a long lease for a term exceeding 99 years or short lets for a period of 6 months or less
• Excluded properties – properties previously excluded from the EPC regime such as buildings scheduled for demolition or buildings of religious worship.

When granted, landlords must register the exemption on the online PRS Exemptions Register. The exemptions will only ever grant a temporary relief and it is the duty of the landlord (upon the expiry of the exemption after 5 years) to demonstrate that the exemption still applies. The process of applying for an exemption, preparing supporting evidence and the obligation to register the exemption will naturally involve landlords in administrative time and cost.

Tenants could be seen to benefit from the new regulations with lower energy bills, and because the cost of the improvements are likely to be incurred by landlords. Some landlords could argue that service charge clauses within their leases are wide enough to allow some of the costs of improvement to be shared with the tenant. Tenants, on the other hand, may argue that it would be inappropriate, and thus outside their obligations to pay service charge, for them to be required to contribute a share of the costs of improving the long term energy efficiency of the property which will be of benefit to the property after they cease to be tenants.

Tenants who sublet properties and who are therefore landlords themselves are of course also caught by the regulations and so may wish to be discussing energy efficiency improvements with their landlords.

If you are a landlord of a property that currently has an EPC rating of F or G and there is a question over whether or not your tenant can be required to share the cost of these improvements or you will shortly be re-letting and would like that to be the case, it is important to take legal advice. Similarly, you may wish to take advice if you are a tenant and the landlord wishes you to share such cost. Legal advice may be sought on current leases, or the amendment and drafting of new leases in light of the regulations where clauses may specify and clarify the division of costs liabilities between the respective parties within the lease.

For any further information you can contact Colin, or the Commercial Property team, on 02380 717717 or email colinwinyard@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.