The Energy Act 2011 placed an obligation on the Secretary of State to bring into force improvements to energy efficiency standards for privately rented non-domestic properties. The effect is that from 1st April 2018, all landlords must ensure that the commercial property has a minimum EPC (Energy Performance Certificate) rating of E before a new lease or a lease renewal can be granted. From the 1 April 2023, all lettings whether new or existing will be covered by the regulations. However, the regulations exclude the following:
- Short term lets (tenancies granted for a term of 6 months or less and provided that the granting of the tenancy does not mean that the tenant will have occupied the property for in excess of 12 months);
- Property let for a term of 99 years or more;
- Commercial properties that are exempt from needing an EPC remain exempt. These include listed buildings, places of worship, temporary buildings (for two years or less), property which is to be demolished, stand-alone buildings with a total useful floor area of less than 50 square metres and industrial sites, workshops and non-residential agricultural buildings with a low energy demand.
Along with the above exclusions, there are also exemptions that are afforded to the Landlord to ensure that only appropriate and cost effective improvements are undertaken as part of these regulations. The Landlords are exempt for a period of 5 years from ensuring that the property is an E rating or above for EPC purposes in the following circumstances:
- The proposed improvements are not cost effective either under the Green Deal’s Golden Rule (ie where repayments for efficiency measures plus interest must be the same or less than the expected energy savings) or within the seven year payback;
- The necessary consents that would be required to install the energy efficiency improvements required by the regulations cannot be obtained by the tenant, lender or superior landlord. Please note that the landlord must use reasonable efforts to try and obtain these consents from the third parties but non-statutory guidance has yet to be issued as to what constitute reasonable efforts and unreasonable conditions attached to consents obtained;
- A relevant suitably qualified expert provides written advice that the measures will reduce the property value by 5% of more, or that wall insulation required will damage the property
If one of the above exemptions applies, it is for the landlord to ensure this is registered on the Private Rented Sector (PRS) Exemption Register, which is the centralized register used by the DECC to target non-compliance of the regulations and assist with the local authorities directing enforcement action.
The Energy Efficiency Regulations also account for situations where the landlord has no choice but to grant a lease or the landlord is stepping into a non-compliant situation (ie where the property is being purchased or transferred to a lender subject to a non-compliant letting). If either of the these situations arise, the landlord has a six month period of grace to comply with the regulations or demonstrate that one of the above listed exemptions apply.
Although the Local Authorities will enforce the regulations, it is expected that Trading Standards will undertake the enforcement activity.
Where the Local Authority suspects that the landlord is not complying with the regulations or has not sufficiently proved an exemption, the Local Authority can serve a compliance notice on the landlord requesting further information required to assist the Local Authority in determining whether there is compliance. If the information is not provided or is insufficient to confirm compliance, then a penalty notice can be issued in relation to the breach.
The penalties for non-compliance are civil rather than criminal and the punishment for non-compliance can be financial penalties and/or public notification of non-compliance. The penalty regime is as follows:
- £5,000 for providing false or misleading information to the PRS Exemptions Register or failing to comply with a compliance notice. Non-compliance of this nature can also mean a public notice being available on the PSR Register.
- 10% of rateable value (minimum of £5,000, maximum of £50,000) where the non-compliance has been for less than 3 months. Non-compliance of this nature can also mean a public notice being available on the PSR Register.
- 20% of rateable value (minimum of £10,000, maximum of £150,000) where the non-compliance has been for over 3 months. Non-compliance of this nature can also mean a public notice being available on the PSR Register.
The regime for penalties depends on the severity and length of time of non-compliance.
Review and Appeals
It is possible for the landlord to request a review of the Local Authority’s decision to issue a penalty notice and if the Local Authority determine that the penalty notice was served in the correct manner and still satisfied that the landlord has committed a breach, the landlord can appeal to the First Tier Tribunal.
Conclusion – is it all doom and gloom for landlords?
In short no, but owners and occupiers of commercial properties would be well advised to start taking steps now to identity and implement the improvements to the energy efficiency of their property giving consideration to the cost and viability of implementing these measures.