Energy Efficiency Standards for Commercial Property

It seems every law firm and surveyor’s practice website is carrying a warning about the dire consequences of the new energy efficiency standards for commercial property which come into force on 1^st April 2018. The effect of the new rules will make it an offence to let, underlet or assign a property whose EPC rating is below E. But the impact may not be as great as feared, given the numerous exemptions, low minimum standard and lack of rigorous enforcement procedures.

All properties which are exempt from the requirement for an EPC to be produced when it is being marketed will also be exempt from the energy efficiency standards. These include places of worship, industrial sites and workshops such as foundries, packaging plants and warehouses, agricultural buildings with a low energy demand, stand-alone buildings with a useful floor area of less than 50m2 and buildings that only have hot water or electric lighting. Thus a large number of buildings which would potentially have an EPC rating of F or G will fall into a category where an EPC is not required further diluting the impact of the new rules.

Many more buildings that fall outside the above categories can also be discounted because they fall within the temporary exemption whereby they do not have to comply with the new rules for a further period of five years. These are properties where:-

– the consent of a third party is required to carry out the energy efficiency upgrade works and that consent has been denied; or

– the required improvements would have a negative impact on the value of the property by 5% or more; or

– the upfront costs of the improvements would not meet the ‘golden rule’ under the Green Deal, that is for the pay-back period to be no more than seven years

These properties will need to be reported to DECC who will keep a register of them, but they will have a further five years before they need to comply.

Landlords will also be able to rent F and G rated properties where they can demonstrate that there are no relevant energy efficiency improvements that can be made or show that improvements have been made but the property still falls below the E rating. This will remove yet more properties from the stock to which the rules will apply.

Whilst the penalties for non-compliance are high enough to discourage landlord’s from flouting the rules (£10,000 or, if higher, 20% of rateable value up to a maximum of £150,000) enforcement will fall to local authorities who are already overstretched and suffering from a funding squeeze and, in many cases, are unlikely to have the resources available to enforce the rules in an effective manner.

All of these factors will serve to take the sting out of the new rules and should give comfort to landlords and tenants who are thinking of underletting or assigning their leases. For those whose properties fall below the E rating and who cannot claim one of the exemptions, there are still almost three years in which to carry out the energy improvement works necessary to bring the property up to the required standard.

Perhaps the only dark cloud on the energy efficiency horizon is the ability of central government to review the rules every five years with the first review falling in 2020. Whilst there is no future trajectory for the minimum standards, the UK must comply with its legally binding carbon targets and increasing the minimum to a D rating would be a step towards that. Although with a general election likely in that year it would take a brave Secretary of State to grasp the nettle.

This is not legal advice; it is intended to provide information of general interest about current legal issues.

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