This will have a major impact on landlords, tenants and lenders.
Under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations):
- from 1 April 2018, landlords of commercial properties must not renew existing tenancies or grant new tenancies if the property has an EPC rating of band F or G unless the landlord registers an exemption.
- from 1 April 2023, landlords must no longer let or continue to let commercial property which has an EPC rating of band F or G unless the landlord registers an exemption.
Essentially, where a building falls short of the Minimum Energy Efficiency Standards (MEES), the landlord must carry out works to improve the building’s energy efficiency performance or pay a civil fine.
The fines could prove to be quite substantial – up to £50,000 per property for a breach of up to 3 months and up to £150,000 per property for a breach of 3 months and over. There will also be reputational sanctions in the form of “naming and shaming” of non-compliant landlords.
Local authorities will enforce the Regulations.
- The landlord has undertaken improvements that are cost-effective but the building remains below an E EPC rating. (Cost effective broadly means that an improvement pays for itself within seven years).
- The landlord is required by a contractual or legislative obligation to obtain a third party’s consent or permission to undertake relevant improvements relating to the minimum standard and such consent was denied, or was provided with unreasonable conditions. A third party would include a tenant, lender, superior landlord/freeholder or planning authority etc. The landlord will need to demonstrate it used reasonable endeavours to obtain that consent.
- Measures required to improve the property are expected to cause a capital devaluation of the property of more than 5%.
- The installation of wall insulation would have a negative impact on the fabric or structure of the property (or the building of which it is part).
The exemptions register will be open from 1 April 2017. If a landlord wishes to register an exemption it will have to provide supporting evidence. An exemption will last for 5 years, at which time the exemption will be reviewed.
Property specific information relating to exemptions will be publicly accessible which may cause reputational issues for landlords of “sub-standard” properties. Exemptions cannot be transferred to new landlords or owners of a property on sale or other transfer and will cease on such a transfer. If the new owner continues to let the property it will need to either improve the property to the minimum standard at that point, or register an exemption where one applies.
Buildings excluded from the scope of the requirements:
- Buildings and monuments officially protected as part of a designated environment or because of their special architectural or historical merit where compliance with certain energy efficiency requirements would unacceptably alter their character or appearance. Listed buildings may not be exempt.
- A building used as a place of worship and for religious activities.
- A temporary building with a planned time of use of 2 years or less.
- Stand-alone buildings with a total useful floor area of less than 50 square metres.
- Buildings which are not required to have an EPC such as industrial sites, workshops and non-residential agricultural buildings with a low energy demand.
- Buildings let on tenancies of less than 6 months (with no right of renewal).
- Buildings let on tenancies of over 99 years.
- Buildings for which an EPC has been obtained voluntarily where one is not needed. Official registration of any such EPC will not in itself require the landlord to comply with the minimum standard.
Action for lenders:
- Consider the threat to lenders where a building does not meet the minimum standard. This could lead to a reduction in the value of the security and ability of a landlord borrower to let the property which in turn could affect the ability of the landlord borrower to make repayments through loss of rental income and additional capital expenditure costs.
- Be aware that a lender would be subject to the Regulations where it takes possession of property following default.
- Ensure sufficient information is obtained on valuation of the asset to understand the impact of MEES on the security. The risk and the cost of borrowing needs to be correctly priced to enable the risk to be monitored adequately.
- Consider whether loan monitoring procedures need to be adapted to take account of the potential risks e.g. requiring an EPC certificate from the borrower on all non-exempt lettings and requiring a strategy plan from the borrower prior to the 2018 deadline.
- Check whether the undertakings and representations in the facility agreement provide suitable protections and rights against borrowers who fail to comply with their statutory obligations under the Regulations.
For further help or advice, please do not hesitate to contact Daniel Edwards.