Landlords take note: Changes to minimum energy efficiency standards come into force this year

2018 is the year when changes to minimum energy efficiency standards come into force for landlords who let property required to have an Energy Performance Certificate (EPC) under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“the Regulations”). There will be significant financial penalties levied for non-compliance, so landlords should prepare for the new requirements while there is still time.

The CLA and Farmers Weekly have recently criticised the government for the lack of clarity and confusion over the new rules, particularly as a consultation document launched just before Christmas for the rules in relation to residential lettings closes just two weeks before the changes are to come into force. The CLA has warned landlords of “chaos in the weeks ahead”.

So, what are the changes and how will they apply to landlords?

Commercial premises

From 1 April 2018 leases of commercial properties with an EPC rating of F or G will be non-compliant with the Regulations.

Leases granted before 1 April 2018 with terms that will continue until 2023 will not fall under the new Regulations until 1 April 2023. This gives landlords time to work to do the work necessary to make the property compliant.

Under the Regulations, landlords of F or G rated property must carry out “relevant energy efficiency improvements” before the premises can be lawfully let. There are two tests for establishing what improvements will be required:

• The improvements must be recommended by a report made by an energy assessor or a surveyor or in a Green Deal advice report. Examples include the upgrading of heating systems (such as through installations of air source heat pumps, PV power, biomass boilers), or replacing windows, doors or roof lights. 
• These improvements will only be required if they will achieve an energy efficiency payback of seven years or less - where the savings on the energy bills resulting from the works will equal or exceed the cost of the works within seven years or less.

The improvements must either be completed or the landlord must claim and register an exemption before the lease proceeds.

There are various exemptions available to landlords, which may be relied upon if registered on a national register (Private Rented Sector (PRS) Exemptions Register). The exemptions only last for five years and include instances where: 

1. The premises still have an F or G rating even if all of the relevant improvements have been made. 
2. Where no improvements can be made as they do not satisfy the above financing test. 
3. Where the necessary consents (such as planning permission or building regulations approval or consent from lenders) cannot be obtained.

There are also temporary exemptions available if, for example, the lease is being renewed under the Landlord and Tenant Act 1954, or where there is a surrender a re-grant of an existing lease. In these instances, the landlord has six months before it has to comply with the

Regulations or establish and register an exemption.

Penalties for non-compliance are enforced by the relevant local authority. If a landlord leases a non-compliant property then the penalty is 10 per cent of rateable value of the premises, subject to a minimum of £5,000 and maximum of £50,000. After three months this rises to
20 per cent of rateable value with a minimum of £10,000 and a maximum of £150,000.

Residential properties

Lettings on assured shorthold tenancies, Rent Act 1977 tenancies and various protected agricultural tenancies (such as Rent Act 1986 tenancies) will also be subject to the new Regulations.

The timescales are slightly different to those for commercial properties:

• New leases granted on or after 1 April 2018 are caught, as are existing leases that are renewed or extended on or after that date. 
• Lettings granted before 1 April 2018 will be caught from 1 April 2020.

The tests for the “relevant energy efficiency improvements” that are required are similar to those set out above for commercial premises but with a change to the second limb, the financial payback test. Further changes to the second limb are proposed, but the current test is that the landlord must either be able to fund the improvements through grants from central or local government, have the work done free of charge pursuant to obligations imposed by the Gas Act 1986 or the Electricity Act 1989, or have the works financed by a Green Deal loan (provided that the repayments for the improvements must be the same or less than the expected energy bill savings (in the first year). So, to the extent that a grant is not available, the works must be funded by a Green Deal loan. Note that under these loans, the repayment is made by way of a surcharge on the electricity bill, which will usually paid by the tenant.

Under the current government consultation, the proposal is that the landlord may be required to pay for remedial works, subject to a £2,500 cap. The consultation closes on 28 March 2018.

The exemptions to the regulations are similar to those for commercial premises and again landlords must register the exemption.

The penalties for leasing a non-compliant residential property range from £2,000 to £5,000 but could be higher.

Landlords of commercial and residential properties are therefore urged to ensure that their properties comply with the new Regulations before it is too late.