2018 could be a watershed year for some landlords, thanks to the Energy Efficiency (Private Rented Property) Regulations 2015, says commercial agent Prop-Search, with the potential for the asset value of many property portfolios to be badly affected.
From 01 April 2018, commercial landlords must upgrade their properties to an EPC rating of at least grade E before they can renew existing leases or grant a lease to tenants, with a few limited exemptions. So, almost all grade F and G buildings will potentially cease to be lettable, although they can still be sold.
Samantha Jones, an Associate Director of Prop-Search, said; “Landlords who already have EPCs in place with ratings of E or above should not necessarily sit on their laurels. The requirements are compounded by changes to Building Regulations that came into force on 06 April 2014, which mean that properties that have already been assessed for an EPC re-assessed.”
Given that EPCs must be renewed every 10 years, there is a real fear that many properties assessed prior to 2014 – with an EPC rating of E – could be downgraded to an F or G. This would take them into the category where a new lease cannot be granted after April 2018 unless specific energy efficiency improvements are made first or an exemption applies.
A landlord will be exempt if there is no Green Deal available for the improvements recommended by an independent installer of energy efficiency improvements and it has been assessed that the recommended improvements would not pay for themselves over seven years based on energy savings in the energy bill.
This exemption will also apply if the landlord is unable to increase the energy performance rating of a property to not less than the minimum level because a third party – who had the right to prevent works from being carried out without their consent, such as a lender, freeholder or sitting tenant refused to grant consent or would only grant consent subject to a condition that a landlord could not reasonably satisfy.
The final exemption is where a report has been obtained from an independent surveyor stating that the energy efficiency improvements will decrease the market value of the property, or the building of which it forms part, by more than five per cent.
An exemption will last for up to five years and will need to be pre-registered on a central register for a landlord to rely on it.
Samantha Jones adds: “Whilst some lettings will not trigger an obligation to carry out works, namely short-term lettings under six months or for leases of more than 99 years, the regulations also capture lease renewals.”
There will be significant fines for non-compliant landlords. Landlords that let out non-compliant buildings for up to three months will face a fine of £5,000 or 10% of the rateable value of the property, rising to £10,000 or 20% of the rateable value for periods of more than three months. The maximum penalty for non-compliance will be £150,000.
By 2023, the new rules will be extended to cover all leases, including leases that are already in place.
Landlords are advised to act now to assess the risk to their portfolios, beginning with an audit of their EPCs and their properties. Which properties are energy inefficient? When were the properties last EPC graded? Which buildings are likely to be borderline under the new EPC ratings?
Prop-Search working with an EPC consultant can advise on measures that will develop valuable analyses for landlords with both large and smaller portfolios. And, once you get to grips with what the new regulations will mean for your properties in 2018, there may be a great deal to do in a fairly short space of time.
