For this week’s blog Solicitor Sophie Lynas, in our commercial property team, talks about energy performance certificates and the new rules for landlords, which came into effect on 1st April this year.
An energy performance certificate (EPC) gives a property an energy efficiency rating which is determined by reference to a number of factors such as the age and type of the building, its heating, ventilation, cooling and lighting systems. The most efficient rating is an ‘A’ and the least efficient rating is a ‘G’. An EPC contains information about the estimated energy use, fuels costs and the environmental impact of the property. It also contains recommended measures to improve the energy performance of the property.
When do I need to supply an EPC?
An EPC is required when an existing property is sold, or rented out, and must be supplied to a prospective buyer or tenant free of charge. The EPC must be supplied when any information is first provided about the property to the prospective buyer, or tenant, or when the prospective buyer or tenant first views the property, whichever is the earlier.
There is also a requirement to provide an EPC to a guarantor who is required to enter into a new lease following the forfeiture or disclaimer of an existing lease, irrespective of the fact that they are under an obligation to enter into the new lease.
An EPC must be provided when a building is constructed and physically complete and certain refurbishment works may also trigger the requirement for an EPC. Although the EPC Guidance for Non-Dwellings does not provide any specific guidance on the point, it is assumed that intra-group transfers are caught by the EPC regulations. There are a number of exceptions when an EPC will not have to be provided such as when an existing lease is extended or renewed, when a property is purchased pursuant to a compulsory purchase order and when a lease is surrendered. An EPC is not required when shares in a company are sold, which does not involve the disposal of the property in which that company is located, where the property remains in the ownership of the company.
Minimum Energy Efficiency Standards
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, SI 2015/962 imposes minimum energy efficiency standards which means that a property cannot be let with an ‘F’ or ‘G’ rating. These minimum requirements apply when a new lease is granted to a new or existing tenant effective from 1st April 2018. The implication of this for landlords is that they must ensure that their properties are compliant with these regulations. If the energy rating of the property is ‘F’ or ‘G’, then measures will need to be taken by the landlord to improve the energy efficiency of the property. The recommendations contained in the EPC, or Recommendation Report, should be reviewed as a starting point to identify measures for improving efficiency. There are also implications for tenants as they will not be able to assign or sublet their leases if the property is rated below an ‘E’.
Practical Considerations for Commercial Landlords
When letting a property, commercial landlords should consider the following:
- Alienation provisions – assignments and sub-lettings are caught by the EPC regime. In these circumstances, it will be the existing tenant’s responsibility to provide an EPC to the incoming tenant or sub-tenant. Landlords should try to negotiate a clause in the lease that states that the landlord will be provided with a copy of any such EPC.
- Surrender – as discussed above, an EPC is not required when an existing lease is surrendered. This exception does not apply in a business sale where the tenant surrenders the lease and the landlord is required to grant a new lease to the purchaser. The landlord should try to negotiate a clause in the lease that states that the outgoing tenant will pay for the cost of an EPC. Alternatively, a requirement for the outgoing tenant to provide the landlord with an EPC could be documented in the surrender.
- Alterations – if the landlord gives consent to carry out alterations, it should consider the nature of the works being carried out by the tenant and whether this will trigger the requirement for an EPC. The landlord should make enquiries as to whether the requirement for an EPC relates to the whole of the property, or just the tenant’s demise. The lease should include wording to the effect that the tenant will need to provide an EPC if they carry out alterations which trigger the EPC requirement. The landlord should also consider the effect that the alterations will have on the energy efficiency rating of the property, and include reinstatement provisions if the alterations will have a negative impact.
Consequences of non-compliance
Failure to comply with the EPC regime, in respect of non-dwellings, could result in a fine of between £500 and £5,000 depending on the rateable value of the property. Penalty charge notices can also be issued to occupiers for failing to display a valid EPC and failing to possess a valid advisory report. The penalty charge notice can be withdrawn in circumstances where it is shown that all reasonable steps were taken to avoid breaching the EPC regime.
If you have any questions or require further advice, please contact our Commercial Property department on 01642 356 500/0191 232 2574.