The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 ("the Regulations") imposed a new Minimum Energy Efficiency Standard, which came into force in April 2018.
The Regulations cover residential and commercial property which is privately-rented in England or Wales and so will potentially impact any charity renting out its property.
Prohibition on letting 'sub-standard' property
The Regulations prohibit landlords from:
- granting a new lease (which includes renewing an existing lease) of 'sub-standard' property after 1st April 2018; or
- continuing to let 'sub-standard' property beyond 1st April 2020 (residential) or 1st April 2023 (commercial),
unless there is a 'legitimate reason' for doing so.
The Regulations apply equally to sub-lettings. If you are a charity leaseholder who sublets some or all of its property, any non-compliance with the Regulations by your landlord will not necessarily reduce your own liability as sub-landlord (subject to the exemption in a situation where a superior landlord refuses consent to such works – see below).
When is property 'sub-standard'?
A property is sub-standard if it fails to meet the required minimum level of energy efficiency, which is currently an EPC rating of 'E' or above. It is possible that this minimum level will be reviewed in the future.
As a first step towards establishing potential liability, charities letting or intending to let property should ensure that they have a valid EPC for that property. As a general rule, an EPC is valid for 10 years. An EPC will come with a 'recommendation report' outlining what can be done to improve the property’s rating.
'Legitimate reasons' for letting sub-standard property
A landlord has a 'legitimate reason' to let sub-standard property if one the exemptions listed in the Regulations applies.
Each of the exemptions is subject to detailed requirements which are too lengthy to cover in this article, but in summary they include situations where:
- the tenant or another relevant third party (such as a superior landlord or a mortgagee) has refused to consent to the energy improvement works;
- carrying out the energy improvement works would in the opinion of an independent surveyor devalue the property by more than 5%; or
- the landlord has made all the 'relevant' energy efficiency improvements that can be made to the property, but it still remains sub-standard. (What constitutes a 'relevant' improvement is subject to detailed guidance for residential and commercial property respectively.)
In addition, a 'temporary exemption' can be granted in certain situations where a landlord needs additional time to comply with the Regulations.
A landlord claiming one of the above exemptions must register this on the Exemptions Register. Certain pieces of evidence will need to be filed, depending on the particular exemption claimed.
The benefit of each exemption is time-limited (meaning the landlord may need to renew its claim in the future) and cannot be passed on upon sale of the property.
Charity landlords who believe they may be entitled to claim an exemption should take detailed specialist advice. Further guidance on the exemptions can be found here.
Consequences of non-compliance
A lease granted in breach of the Regulations is still legally binding on both parties, and the tenant won't have any grounds to withhold rent or terminate the lease early because of the non-compliance.
However, a landlord who lets or continues to let sub-standard property unlawfully runs the risk of enforcement action, which potentially includes not only financial penalties but also details of the breach being entered onto a publicly accessible register (with the consequent potential for adverse publicity, likely to be of particular concern to charity landlords).
Not carrying out the works could also impact on any future sale of the property by the charity landlord, given that any future purchaser who themselves intended to let out the property would be likely to factor the costs of doing the works into the purchase price they were willing to pay.
There are various energy efficiency consultants who can offer advice on the best and most cost-efficient way to improve the energy efficiency ratings of buildings. Since these changes may also reduce running costs for the buildings more generally and be sold as a good thing to tenants, purchasers and stakeholders, they may be of net benefit notwithstanding their cost.
You can hear more about this and other aspects of being a charity landlord at our "Sharing your Charity's Property: how to do it" seminar on Wednesday 10 October.
For further information, please contact:
Catherine Evans on 0208 394 6458, Catherine.Evans@russell-cooke.co.uk
Clare Garbett on 0208 394 6487, Clare.Garbett@russell-cooke.co.uk