What commercial property landlords and tenants need to know about the Energy Act – 1st April 2018

From 1^st April 2018, the Energy Act comes into force, meaning residential and commercial property landlords must achieve an EPC rating of at least an E on any property with a new lease. Coodes Solicitors’ Commercial Disputes Associate Abi Lutey and Partner and Paula Dunkley discuss what it all means for commercial property landlords.

The Energy Act was announced in 2011, giving landlords time to prepare for the new regulations. While there has been a lot of discussion about the issue within the residential property sector, our Commercial Property team suspects there is less awareness among Commercial Property landlords. However, the changes brought about by the Energy Act apply to all rental properties – both residential and commercial. Lenders are already discussing the issue with us. It seems likely that commercial property landlords will be more at risk for breaching the regulations, so it is vital that anyone who rents a commercial property understands what the changes mean and what they need to do to comply.

What changes will the Energy Act bring about for commercial property landlords?

The Energy Act brings in important new regulations on residential and commercial property lettings. With just a few exceptions, all properties have an Energy Performance Certificate (EPC) rating, indicating how energy efficient it is, with ‘A’ being the most efficient and ‘G’ the least. The change in regulations mean that, for a landlord to legally rent it out, a property must have a minimum of an ‘E’ rating.

It is based on a number of factors, including the building’s age, insulation and heating systems. While the new regulations are unlikely to be an issue for most modern commercial properties, they could be a problem for older properties, such as historic buildings converted into offices or retail outlets in traditional high street properties.

The changes will not apply to all leases straight away. From 1^st April 2018 the regulations will apply to new leases, lease renewals and sublettings. So, if a lease is being granted to a new tenant or a lease is being renewed with an existing tenant, the property must have an EPC rating of at least an ‘E’.

From 1^st April 2023, the regulations will extend to all leases, however old. With just a few exceptions, all residential and commercial properties will then need to have an EPC rating of ‘E’ or above.

Because the Government needs to meet its promise to achieve an 80% reduction in CO2 emissions by 2050, an E rating will not be sufficient in future. Rental properties will need to have a ‘D’ rating or above by 2025 and a ‘C’ or above by 2030. We will keep a close eye on this but landlords should be aware that standards may rise again, bringing even more stringent regulations in the future.

What will happen if a commercial property landlord does not comply with the new Energy Act regulations?

A landlord who fails to comply with the Energy Act regulations will no longer be able to let the property until improvements have been made and a higher EPC rating has been achieved. The tenant will also not be able to sub-let the property. Needless to say, the potential sale value of the property will be seriously diminished.

Landlords could face penalties of up to £150,000 for breaching the new regulations. The penalty will depend on how long the landlord has been in breach and the rateable value of the property. The details will also be published, causing reputational damage.

What issues could the Energy Act cause between commercial property landlords and tenant businesses?

Our Commercial Disputes teams is anticipating a number of cases coming through as landlords and tenants come to blows over improvement works. These works could be very disruptive to tenants who want their businesses to continue operating as usual. And with landlords spending money on improvements to buildings, they may increase rents to attempt to recover their costs.

Are there any exceptions to the regulations?

The regulations apply to tenancies of between six months and 99 years. That means that they will not apply for holiday lets. There are also certain ‘cost effective’ and ‘devaluation’ exemptions. In other words if changes to the building will reduce the property’s value the landlord will not be required to make them. Exemptions need to be pre-registered on the exemptions register and once registered will last for five years.

In some circumstances, landlords of properties that do not meet the regulations will be given six months to make improvements and comply. This includes when tenancy is granted by operation of law (e.g. a renewable under the Landlord & Tenant Act 1954) or when a property is sold or transferred to a lender. This is all quite complex, but a specialist lawyer can advise you on whether or not you would be eligible for an extension.

For any advice in relation to your responsibilities as a landlord, please contact the team on 01872 246200 or info@coodes.co.uk

For advice on settling a commercial property dispute, please contact Abi Lutey on 01872 246200 or abi.lutey@coodes.co.uk