The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“the Regulations”) come into force during the course of 2016 with the aim of assisting the Government achieve the UK’s legislative targets to reduce carbon levels by 2050. In this article we consider the impact on non-domestic property (commercial property).
The Regulations set the minimum energy efficiency standard for all categories of non-domestic property to an energy performance certificate (EPC) rating of E. Currently, around 18% of the UK’s non-domestic building stock falls below this standard.
The Regulations come into force in two stages: From 1 April 2018 it will be unlawful for a landlord to grant a new lease of a commercial property that falls below the minimum energy standard. Then, from 1 April 2023 it will be unlawful for a landlord to continue to let a non-compliant property, regardless of whether a tenant is in occupation.
There are number of exemptions available: short lettings of 6 months and long leases of 99 years or more. However, other exemptions may prove more important, for example: if an E rating cannot be achieved even after the cost effective works have been carried out, or that necessary consents are unobtainable. It should also be pointed out that a property must have an EPC for the Regulations to bite in the first instance.
Non-compliance with the Regulations could mean hefty financial penalties for landlords. Fines will range between £5,000 and £150,000, depending on the length of term.
Going forward, landlords must plan ahead to ensure works are done to under-performing properties, but who will bear the cost, the landlord or the tenant? ‘Green Deal’ finance has never been available for commercial property. Landlords may be able to fund the initial cost of energy efficiency works but can the cost (or at least part of it) be recovered from the tenant who will benefit from lower energy bills?
The Regulations place an obligation on the landlord not to let the property unless it meets the minimum standard. As such, the responsibility to make and pay for the improvements sits squarely with the landlord. However, tenants may see the cost making its way back to them as landlords attempt to recover their outlay by charging higher rents or making changes to lease provisions.
The area in which a tenant is perhaps mostly likely to notice a change is within the service charge provisions. At law there is a clear distinction between ‘repair’ and ‘improvement’. Leases usually provide that a tenant is liable for the cost of repair but not improvement of the property. On that basis, a landlord would struggle to recover the cost of replacing, for example, plant and machinery that is still within its useful lifespan simply to meet the minimum energy standard. Going forward, we may see landlords seeking to ensure such costs are included within the service provisions so that recovery can be made without argument.
Another term of the lease a landlord might look to for help in recovering the cost of improvements is within the yielding-up provision. In the future, could we see the inclusion of a term requiring a tenant to hand the property back in a condition that complies with the minimum energy standard? It is hard to see how this could be acceptable if it places an obligation on the tenant to go beyond its repairing covenants and hand back an improved property.
In the hypothetical world of rent review a canny tenant might try and argue that there would be no ‘willing tenant’ for a property that does not meet the minimum energy standard to try and secure a nil increase on rent review. In due course, landlords may seek to include a specific assumption that a hypothetical landlord would carry out the works required under the Regulations to make the property compliant.
It is far from clear at this stage what changes in lease drafting we could expect to see and how, if at all, the cost of energy efficiency improvements will be passed onto the tenant. In the context of future lease renewals, we could expect to see a clash between what terms the Court should order under the Landlord and Tenant Act 1954 and what revised terms a landlord would want to introduce to satisfy its statutory obligations under the Regulations. Would a court refuse new lease terms, placing the landlord in breach of the Regulations?
Clarke Willmott’s property litigation team has expertise in all aspects of landlord and tenant law, with particular specialisms in service charge, rent review and dilapidations. If you have any concerns about what impact the Regulations may have on your situation in the future please feel free to give us a call.