From 1 April 2018, all commercial properties in the UK will be required to have a minimum energy performance certificate (EPC) rating of E if they are to be let, meaning that it will be unlawful to let properties with ratings of F or G until improvements have been made to bring such properties up to a minimum EPC rating of E. This will apply both to new leases commencing on or after 1 April 2018 and also to existing leases (although for existing leases, the regulations won't take effect until 2023).
These new minimum energy efficiency standards are set out in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 and will also apply to lettings of residential premises (although the application differs slightly for residential premises and particular consideration of residential premises is outside the scope of this blog).
With these changes taking effect less than 2 years away, if they have not done so already, landlords need to analyse their property portfolios and ascertain which properties have an EPC of F or G. Consideration then needs to be given to the reason for such a low rating and what changes can be made to increase the energy rating to meet the minimum standards (as well as the cost of such changes). Properties which, after 1 April 2018, continue to have an energy efficiency rating of F or G may suffer a reduction in the value of such property and its marketability.
Works to improve energy efficient ratings should be commenced well in advance of 1 April 2018 to ensure that by the time the regulations commence operation on 1 April 2018 the relevant premises continue to be lettable. Costs associated with such works will need to be factored into the landlord's business plan for the property and most likely the costs of such works will need to be approved by (or at least notified to) a landlord's financier.
For financiers, consideration should be given to security properties within their portfolio and whether any of these have an EPC rating of F or G. Financiers can then work with their customers to ensure that appropriate energy efficient plans are put in place, including to:
- ensure any additional capital expenditure required to implement an energy efficiency plan will not affect the customer's ability to satisfy its financial covenants or service its debt;
- ensure any works are commenced and completed in sufficient time to avoid either a decrease in the value of the property (which may affect the customer's ability to satisfy its loan to value covenant) and/or the property or part thereof becoming vacant as a result of the operation of the minimum energy efficiency standards (which may adversely affect the customer's ability to service its debt).
Financiers should also incorporate considerations of sustainability and the EPC rating of prospective security properties into their appraisal process for prospective new customers.
There are some exemptions available to ensure that improvements will be permissible, appropriate and cost-effective, including where the landlord cannot get relevant consents from a tenant or superior landlord or if an independent surveyor indicates that energy efficiency measures will reduce a property's value by 5% or more. However, landlords will need sufficient evidence to prove that they fall within the scope of an exemption and so reliance on such exemptions should be considered carefully.