Thursday, 15 March 2018

Landlords – Minimum Energy Efficiency Regulations Imminent!

Time marches on. I posted in March 2017 about the looming Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 and how landlords needed to check their portfolios to determine whether they were up to standard. Now the date those regulations take effect is nearly upon us.

Unless an exemption applies and has been validly registered, from 1 April 2018 it will be unlawful to grant a new tenancy of property that has an EPC rating of band F or G (shown on a valid Energy Performance Certificate for the property).

From 1 April 2020, landlords must not continue letting a domestic property (basically a dwelling) which is already let if that property has an EPC rating of band F or G, unless an exemption has been registered.

From 1 April 2023, landlords must not continue letting a non-domestic property which is already let if that property has an EPC rating of band F or G, unless an exemption has been registered.

Guidance was issued by the government in October 2017, split into separate notes for domestic and non-domestic landlords. This post only deals with non-domestic property.

Properties rated F or G are termed “sub-standard” in the guidance notes.

Penalties for non-compliance vary depending on how long the landlord has been letting out the property in breach of the regulations and what the rateable value is.

For example, breach the regulations for more than 3 months and the penalty will amount to 20% of the property’s rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.

A different regime of penalties applies to landlords of domestic property.

Lenders will be alive to these regulations and may be unwilling to fund sub-standard property that's going to be let, or even any sub-standard property at all, or may require improvement works to be carried out as a condition of the loan.

PRS Exemptions Register

A landlord may be able to register an exemption allowing them to let, or continue to let, a sub-standard property.

Exemptions, to be effective, must be registered on the PRS Exemptions Register on a self-certification basis, with enforcement authorities monitoring and auditing to ensure compliance with the regulations.

For commercial properties, most exemptions last for 5 years and they are not transferable to a new landlord on a sale of the property or other transfer, so the exemptions are in effect only personal to the landlord registering them.

That means if a let property is sold or otherwise transferred with an exemption registered, the exemption will cease to be effective and the new owner will either need to improve the property to the minimum standard at that point, or register an exemption itself where one applies, if they intend to continue to let the property.

This will make property that is only compliant because of an exemption less attractive to buyers and their lenders, especially if they are going to struggle to qualify for an exemption themselves and will consequently need to make improvements to the property.

What are the exemptions?

·       The landlord has carried out all relevant efficiency improvements, or there are none that could be made to the property, and the EPC rating is still below E.

·       Consent exemption – where third party consent is required for the works and cannot be obtained (this exemption lasts for 5 years or until the tenancy of the non-consenting tenant ends, whichever is soonest).

·       Devaluation exemption – the works would result in a reduction of more than 5% in the market value of the property or the property of which it forms part (this exemption lasts for 5 years).

·       Recently becoming a landlord exemption – this exemption only lasts for 6 months.

I won’t go into further detail on the exemptions (see the guidance for more) but suffice to say there are a lot of caveats and small print, especially relating to “relevant efficiency improvements”.

Managing portfolios

So, Band E is effectively the new minimum level of energy efficiency.

However, well-managed portfolios should aim higher, both to achieve greater energy savings and to reduce the vulnerability of the portfolio to regulation-creep, by which I mean “E” today could become “D” or even “C” in a few years’ time if the regulations are revised. Last year Clifford Chance wrote that the government had decided not to include a trajectory of projected changes to the standards beyond 2018, and would simply review them in 2020, which makes it difficult for landlords to determine how far to go in improving their properties and when.

Due diligence

On 13 March 2018 a new version of standard commercial property enquiries CPSE 1 (version 3.7) was issued. New enquiry 14.8 requires that where a property has an EPC rating of F or G, a copy must be supplied of any information or evidence which has been or could be used to support any registration in the PRS Exemptions Register.

It’s therefore important to make sure the latest version of CPSE 1 is used when acquiring commercial property.

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