Upcoming Energy Efficiency Requirements in the Rented Sector

Introduction 

The UK government has set a target to reduce greenhouse gas emissions by at least 80% by 2050, compared to the 1990 baseline. Since energy use in buildings is a major source of UK carbon emissions, improving their energy efficiency is central to achieving this target. Data suggests that domestic buildings were responsible for 25% and non-domestic buildings for 12% of the UK’s total carbon emissions in 2009. However, to date, incentives for making energy-efficiency investments in the rental sector have been lacking. A general absence of a standard mechanism to split costs and benefits between parties has left property owners reluctant to make investments where their tenants are the ones taking full benefit. The problem has only been exacerbated by high tenant turnover. With this background it is not surprising that voluntary initiatives have had disappointing results and the carrot has now been replaced with the stick... 

The Legislation 

The Energy Act 2011 (“the Act”) placed a duty on the Secretary of State to draw up regulations to improve energy efficiency of buildings in the domestic and non-domestic private rented sector in England and Wales. The Department of Energy and Climate Change (“DECC”) duly drew up regulations prescribing a minimum level of energy efficiency for such properties known as the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (“the Regulations”), which were passed into law on 26 March, together with the Energy Efficiency (Domestic Private Rented Property) Order 2015 (“the Order”). Both remain to be published, although material changes to the drafts are not expected. 

How the Regulations and Order work 

Basic Restriction 

The Regulations provide that, subject to certain limited exemptions, landlords of both domestic and/or non-domestic private rented properties may not: 

(a) grant a new tenancy or renew an existing tenancy of a private rented property after 1 April 2018; 

(b) continue with any existing letting of domestic private rented property after 1 April 2020; or 

(c) continue with any existing letting of non-domestic private rented property after 1 April 2023 

where its energy efficiency falls below the specified minimum standard. 

Specified minimum standard 

The Regulations require all affected buildings subject to, or proposed to be the subject of, affected lettings to achieve an Energy Performance Certificate (EPC) rating of “E” or better. 

Buildings affected 

The Regulations apply to all buildings requiring EPCs (broadly all buildings with heating or air conditioning systems except those due to be demolished). Lettings affected Domestic private rented property was defined in the Act as property let on an assured or regulated tenancy, but excluding certain low-cost social housing. The effect of the Order is simply to extend this to also include certain agricultural tenancies. 

Non-domestic private rented property is any property which is let on a tenancy but not a dwelling. 

Works required 

The landlord will generally be responsible for the cost of any works required to bring its properties up to the specified minimum standards required by the Regulations. However, a tenant of domestic private rented property will be entitled, from 1 April 2016, to request its landlord’s consent to it making energy efficiency improvements to a property and the landlord will not be permitted to unreasonably withhold consent to such works. In this case only, the tenant will be responsible for the cost of the works, unless third party funding is available (for example through a “green deal” loan). 

There is a six-month grace period for a landlord to make improvements in circumstances where the landlord is not at fault for delayed compliance, for example where a lease is granted pursuant to a court order or by operation of law. However this will not apply where there is opportunity for advance preparation, for example on acquiring a non-compliant let property for the first time. 

Exemptions

There are a few limited exemptions from the Basic Restriction referred to above, which include: 

(a) where third party consent is required before any necessary works can be carried out and such consent is withheld; 

(b) where an independent surveyor’s report states that the necessary works will reduce the market value of the property by more than 5%; and 

(c) for non-domestic properties, leases that are either under six months (unless already renewed twice) or originally granted for over 99 years. 

In addition, there is the “golden rule” that the costs of the works required to bring a property up to standard (including interest) must be the same or less than the expected energy savings. In the case of non-domestic property, the efficiency measures must be cost-effective over a maximum seven year pay-back period. Click here to view timeline in browser. 

Regulation timeline