The Energy Act 2011 (the Act) called for the introduction of regulations affecting the leasing of properties with poor energy performance in Scotland, England and Wales. The Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 implements the Act in Scotland, and the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 implements the Act in England and Wales. Whilst the same basic concept of reduction of energy consumption flows from the Act, there are significant differences between the jurisdictions in the manner of implementation of the Act and content of the relevant regulations. Ultimately, the potential practical consequences for property owners now diverge between the jurisdictions and need to be adequately assessed and taken into account.
The English regulations are due to come into force in April 2018 and impose arguably more onerous requirements on landlords. All privately rented properties must meet a prescribed Minimum Energy Efficiency Standard (MEES) which has been set as the equivalent to an Energy Performance Certificate rating of E. It will be unlawful to let properties that fail to achieve the MEES until improvements have been carried out. As a result, owners of properties with EPC ratings of F or G will, in some circumstances, no longer be able to let these properties until energy efficiency has been addressed.
In contrast, from 1 September 2016, owners of large commercial properties in Scotland will have to produce an action plan when they are selling or leasing their property. The Scottish regulations will not prevent owners from leasing properties with poor EPC ratings but rather the owners will have to choose whether the energy efficiency of the property is to be monitored and reported annually or whether works will be done to the property to improve energy efficiency and reduce emissions. An owner looking to sell or lease a property that is affected by the regulations will have to provide any prospective buyer or tenant with an action plan free of charge. No action plan will be needed for an existing tenant renewing a lease or a tenant taking a short term lease for less than 16 weeks.
What buildings do the regulations apply to?
The Scottish regulations apply to non-domestic buildings with a floor area of over 1000m², and units within buildings that are designed or altered to be used separately with a floor area of over 1000m² that do not comply with the 2002 and later Scottish Building Standards. The obligation to comply with the regulations will be triggered by the sale or the grant of a new lease of the property. Lease renewals, for now, will not be affected.
The English regulations will apply to all privately rented property that is not a dwelling, save for some limited exceptions including:
- where the lease is a term of six months or less (provided that the same tenant has not occupied the property for over 12 months);
- any property let on a tenancy for 99 years or more; and
- property types excluded from the EPC regime (including where a lease is already in place and a property is occupied by a tenant).
In contrast to Scotland, the UK Government plans to apply the England and Wales regulations to lease renewals where the property has an EPC, as this is a point where tenant and landlord will be in negotiations.The regulations will be applied in a phased manner; from April 2018, they will apply to new lettings or lease renewals (unless they are within one of the exceptions), and from April 2023 they will apply to all existing leases, not just new leases or lease renewals. It is also intended that the regulations apply where there is an EPC on sub-letting.
Where a tenancy is granted in certain circumstances, such as by operation of law, the landlord will have six months from the date they become the landlord under that tenancy in order to comply with the regulations. Similarly, where a non-compliant property occupied by a tenant is sold, or is transferred to a lender in the case of receivership, the new landlord will have six months to improve the property, or to demonstrate that an exemption applies.
In Scotland, the regulations will not apply to properties improved under the Green Deal or temporary buildings and workshops with low energy demand. They will also not apply to the renewal of a lease to an existing tenant or to short term lets of less than 16 weeks.
In England and Wales, a number of protective measures have been included to ensure that landlords will not have to carry out improvement works that are not permissible, appropriate or cost-effective. Landlords will be exempt where tenant or third party consent is required to improvement works – and such consent has been refused. They would also be exempt if the necessary measures would reduce the property’s value by 5% or more, which must be reviewed every five years.
There are also additional exemptions relating to improvement measures in historic buildings in England and Wales, including an exemption giving specific protections relating to wall insulation. Wall insulation will not be required under the regulations where the landlord has obtained a written opinion from either a suitably qualified expert or an independent installer that meets relevant installer standards of the improvement in question, advising that it is not an appropriate improvement due to its potential negative impact on the fabric or structure of the property itself or the building of which it forms part.
When a landlord considers that they are eligible for a prescribed exemption, they must notify this exemption on an online ‘Private Rented Sector Exemptions Register’ which will act as a centralised database of exemptions relating to the regulations. The exemption will only be valid if registered on the central database by the landlord.
Exemptions in England and Wales will apply for a set period of five years, expiring earlier where a tenant causes the exemption by refusing their consent, and that tenant vacates the property within the five year period. Upon expiry of an exemption, landlords will need to either achieve the minimum standard or obtain a further exemption. Some landlords may voluntarily elect to improve their property before the exemption expires to avoid further work at a later date, but there is no obligation to do so.
Works to be done
In England and Wales, if a property fails to achieve a rating of E or above, the landlord has to carry out improvements to bring the property up to the required standard before they will be able to renew the lease of an existing tenant or grant a lease to a new tenant. The relevant energy efficiency improvements comprise a lengthy list of measures including, but not limited to:
- the insertion of insulating material into the cavity walls of an existing building,
- the installation of a heat producing gas appliance; and
- the installation in a building of a system to produce electricity, heat or cooling by (i) microgeneration or (ii) from renewable sources.
In Scotland, however, the improvement measures are much more limited and comprise the following, which would be practicable to carry out, namely:
- installing draught stripping to doors and windows;
- upgrading lighting controls;
- upgrading heating controls;
- installing an insulation jacket to a hot water tank;
- upgrading low energy lighting;
- installation of insulation in an accessible roof space; and
- replacement of a boiler.
On the sale or the grant of a new lease of a property in Scotland that is affected by the regulations, a new assessor, to be known as a ‘section 63 advisor’, will be appointed to produce:
- an action plan;
- a programme of improvement measures to reduce energy consumption and greenhouse gas emissions from the building; and
- a set energy improvement targets for the building.
The section 63 advisor will discuss his findings with the owner of the property and confirm in the action plan whether the owner intends to defer carrying out the improvement measures recommended or, instead, implement operational rating measures. There is no time limit on how long works may be deferred.
The building improvement measures will only be required where the energy savings over seven years would exceed the initial cost of the works or where a boiler is more than 15 years old. An owner who chooses to carry out the works must complete them within three-and-a-half years and, on completion, register a document of confirmation of improvement (as detailed below) to obtain a new EPC.
If an owner chooses to implement operational rating measures, they must obtain and exhibit a display energy certificate (DEC) in a clearly visible place at the property and renew it every year. In the first year, the DEC will estimate the energy consumption and emissions from the building and thereafter record actual consumption and emissions. Failure to renew the DEC annually will result in the owner losing the right to defer carrying out the improvement measures, and being required to carry out the necessary works.
The action plan, the DEC, and the document of confirmation of improvement must all be registered in a central register that will be accessible to those who have the property details and the reference numbers of the documentation they wish to see.
In Scotland, local authorities have been charged with enforcing the regulations. They will be entitled to impose a penalty charge of £1,000 if an owner fails to produce an action plan or fails to carry out the improvement measures within a three-and-a-half year time limit. The Scottish Government is also monitoring the collection of energy improvement data and, if it sees no reduction in energy consumption or greenhouse gas emissions, may move to make retrofit works such as those prescribed in the Scottish regulations compulsory.
Similar procedures are to be put in place in England and Wales, where if a landlord fails to comply with a request for evidence of an exemption (through a compliance notice issued by the local authority) or the evidence is deemed inadequate or false, a fixed penalty notice will be issued. The UK Government intends to ensure that local authorities retain discretion regarding fixed penalty notices for non-compliance. Penalties for letting a property in breach of the rules are:
- if the breach was for less than three months at the time of service of the penalty notice, a fine equal to the greater of £5000 and 10% of the rateable value of the property – with a maximum penalty of £50,000;
- if the breach was for more than three months at the time of service of the penalty notice, a fine equal to the greater of £10,000 and 20% of the rateable value of the property – with the maximum penalty being £150,000.
It is understood that the penalty will be set with reference to a property’s rateable value, degree of infringement and length of non-compliance. Particular circumstances, including errors by landlords, will also be taken into account. Letting or continuing to let a property in breach of the regulations will not affect the validity of the underlying lease, or the enforceability of any provisions under the lease.
Looking to the future
In Scotland, those considering buying, selling, leasing or funding a building affected by the regulations should take into account the costs of carrying out improvement measures or implementing operational rating measures when pricing the property. If buying a building with a sitting tenant, the purchaser must ask if the costs can be recovered and whether the necessary rights of access are reserved in terms of the existing lease. They should also check whether the current service charge provisions allow the landlord to recover the cost of carrying out works or monitoring the property under the operational ratings regime.
In contrast, in England and Wales there remains some uncertainty surrounding the fact that the MEES may be set higher in the future and that the methodology for assessment may be revised and become more stringent. In addition to F and G rated properties, some E rated properties are likely to be affected adversely in terms of market value as they may be deemed ‘riskier’ than better-rated buildings. It may be sensible for landlords to carry out greater energy efficiency improvements than required by the regulations, not only in light of potential future tightening of the MEES, but also in anticipation of potential valuation and cost implications.
In both jurisdictions, landlords negotiating new leases should ensure that they reserve adequate rights to carry out any investigations or improvement works, agree with any prospective tenant who is to be responsible for paying the costs of carrying out the works or monitoring energy performance and emissions, and consider what effect, if any, the energy performance of the property will have on initial rent and rent review.
The basic aim of energy reduction is laudable; the trouble is that there is not a uniform answer as to how best this is to be achieved. Both north and south of the Border it seems that the common end result is likely to be that in general it will be far easier to deal with properties with better energy ratings. Time will tell which approach is most effective in terms of achieving this aim but it seems likely that this type of government intervention is not going to be the last, and inaction seems likely only to bring about ever more stringent regulations.