New regulations were published in March that are likely to significantly affect landlords. From 1 April 2018, it will be unlawful to let property with a low energy rating – this is part of the government's drive to improve the energy efficiency of rented properties.
As of April 2018, a landlord cannot grant a new lease (including a sub-lease) or a renewal lease of premises with an EPC rating of F or G. From 1 April 2023, a landlord cannot continue to let property with an F or G rating. So, even when an existing lease was granted years ago, it will be unlawful to continue to be the landlord of that lease after 2023 unless the energy rating is improved to E or higher. There are exceptions where the improvements are not cost-effective (there are detailed rules for calculating this), or the landlord cannot obtain consent from the tenant or a third party whose permission is required, such as a superior landlord.
These exemptions are only valid for five years, are personal to the current landlord, and will have to be noted in a public register. Other exemptions include listed buildings and certain other properties; short leases of six months or less; and long leases of 99 years or more. If a lease is renewed under the Landlord and Tenant Act 1954, or if a landlord buys a non-compliant property after 2023, the landlord has six months to comply unless an exemption applies.
A landlord in breach of these regulations will face a civil penalty notice of up to £150,000. There will also be a "name and shame" register.
Existing EPC records suggest that around 18% of commercial properties have an F or G rating. Whilst the new rules are three years away, it takes time to retrofit a property, so landlords need to keep the regulations in mind when buying, redeveloping or managing properties.
In most cases, it will be the landlord who bears the cost, though this is not specified in the regulations. While landlords' lawyers may insert clauses in new leases making tenants responsible, most tenants are unlikely to accept this. However, the cost of energy improvements should be balanced by their greater appeal to tenants such as large technology companies, who are increasingly calling for eco-friendly properties.
The government are expected to widen the net beyond F and G rated premises in the future, so the best approach may be to make properties as energy efficient as the budget can stand. As an added benefit, "going green" will be a good PR opportunity for many property companies.
Please note, this update considers commercial properties - slightly different rules apply to domestic properties.
For further information please contact:
Partner, Real Estate
Professional Support Lawyer, Real Estate