Energy Performance Certificates – Do They Matter?
Energy Performance Certificates (EPCs) measure the energy efficiency of a building and evaluate potential improvements in that building’s efficiency. You may have a prior awareness of EPCs, but does the energy efficiency rating afforded by an EPC actually matter?
The Government has introduced legislation that seeks to improve energy efficiency in tenanted property. This applies to both residential and commercial property, so if you are a landlord you should be aware of your obligations and the potential penalties for non-compliance.
Landlords have been legally obliged to provide an EPC when marketing, selling or renting most properties since 2008. Until fairly recently, the actual rating did not have any legal consequences. This changed on 1 April 2018 when the Energy Efficiency (Private Rented Property) (England and Wales) Regulations came into force, rendering it unlawful to let any property (residential or commercial) with an EPC rating of F or G. This obligation currently applies to new lets and to tenancy renewals, but will also apply to existing tenancies in due course: from 1 April 2020 for domestic properties and from 1 April 2023 for non-domestic properties.
These obligations are not absolute. For example, if a landlord has made all relevant energy efficiency improvements to a property and it is still rated F or below, the landlord can apply for the property to be exempt from this requirement of the new Regulations. Other exemptions beyond the scope of this note are also available.
The Regulations also contain a right for tenants of domestic property to request the Landlord’s consent to carry out works that would improve energy efficiency. The Landlord’s consent must not be unreasonably withheld (i.e. there must be a good reason for refusing such works) even if the Lease does not contain this right or even prohibits such works being carried out.
Why Should Landlords Care?
After giving notice to a landlord of a breach of the EPC rating requirement, fines may be issued of up to £4,000 for domestic properties and £150,000 for non-domestic properties. The enforcement authority will also be able to publish details of the breach on a public register.
What to Do in Practice – Landlords and Tenants
In light of the potential penalties, it is well worth landlords both ensuring that newly let properties meet the required energy efficiency standard and scheduling works to ensure that properties already let will meet the obligations due to come into force over the next five years. It is inadvisable to assume that just because a property currently holds an EPC rating of E this rating will not change. Whilst the rating criteria should be the same across the board, there is some subjectivity involved and it is not a given that two different energy assessors would grade a property the same. Furthermore, as properties become worn down over time, energy efficiency may decrease.
Ensuring that the EPC rating is well above the threshold will eliminate the chance of inconsistencies between different assessors causing a once-compliant property to fall foul of the Regulations when a new tenant is due to move in. This will also ensure that the property is prepared for any rise in the minimum energy efficiency standard in the future, which is likely to occur.
It is worth noting that the Regulations only apply to properties that actually have an EPC rating of F or G. If a property does not have an EPC and continues to be let to the same tenant on 1 April 2020/2023, the landlord will not need to improve the standard of energy efficiency and an EPC will only need to be commissioned once a new grant or renewal of lease is carried out. It is worth pointing out that new landlords cannot simply refuse to commission an EPC, as a valid EPC must be provided in this circumstance.
There are two major ways in which the Regulations could have significant impacts on leases:
• Open market rent reviews may be affected. If the EPC gives a rating of F or G the tenant may argue that the property cannot legally be let and that therefore the rent cannot increase.
• If an EPC rating is reduced to F or G during the term of a lease, tenants could also claim that the works the landlord would need to undertake to improve the energy efficiency rating of the property could supersede landlords’ works in relation to dilapidations claims, thus reducing landlords’ alleged losses arising from such claims.
In consequence, landlords will want tenants to be prevented from having an EPC commissioned unless one is legally required. This will restrict tenants’ potential ability to cause a property’s rating to be amended mid-term from, for example, E, to F or G, impact rent review or dilapidations claims. Tenants will want to have this right as they could argue that the EPC should be as accurate and up-to-date as possible.
Landlords will also want to think about restricting tenants’ ability to carry out alterations that could adversely impact the property’s energy efficiency and could therefore lead to the landlord being obliged to carry out works at the end of the lease to rectify this.
Whether you are a landlord or a tenant, you should ensure that any lease entered into contains the necessary clauses to ensure that your preferences are adequately documented.
These notes are intended for information purposes. They are not a full statement of the law and should not be relied on as specific legal advice.
KATHERINE FLASHMAN KITSON CELEBRATING 25 YEARS AS A DIRECTOR OF PARNALLS
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