The Energy Act 2011 contains a clause with potentially severe implications for about 20% of all commercial property. What advice should solicitors dealing with commercial leases give to their clients at this stage?
Section 49 of the Energy Act is not yet in force. It states:‘(1) The secretary of state must make regulations for the purpose of securing that a landlord of a non-domestic property –(a) which is of such description of non-domestic property as is provided for by the regulations,(b) in relation to which there is an Energy Performance Certificate [EPC], and(c) which falls below such level of energy efficiency (as demonstrated by the Energy Performance Certificate) as is provided for by the regulations, may not let the property until the landlord has complied with the obligation mentioned in subsection (2).
(2) The obligation is to make to the property such relevant energy efficiency improvements as are provided for by the regulations.’
Section 49 (4) provides that the first regulations must be made before 1 April 2018. Draft regulations have not yet been published. It has been widely reported, and is stated on the Department of Energy & Climate Change (DECC) website, that the effect of this legislation is to prohibit the letting of property where the rating on an EPC is below E. This follows the Hansard reports, which envisaged that the legislation would only affect premises with F or G ratings in EPCs. The DECC considers that nearly a fifth of commercial properties with energy certificates are in those categories.
The government considers the measures will have no upfront cost to landlords. Landlords will have fulfilled the Energy Act requirements if the premises have reached the required standard, or the landlord has carried out the maximum package of measures funded under the Green Deal and/or the Energy Company Obligation. The Green Deal is a financing framework, allowing energy improvement measures which are funded by a charge on energy bills.
The drafting is mandatory, not discretionary; the secretary of state must make the regulations. In the committee stage before the act was passed, the government amended the wording of the bill (as it was then) to provide for this ‘hard start’ to the regulations. The hard start means that all affected properties remaining when the regulations come into force will be breaching the regulations. The hard start is a key part of the argument for needing to leave a longer period of time before the regulations start (2018 not 2016) because almost all properties need to have been given time for their tenancies to have turned over before the regulations come into force.
Interestingly, Friends of the Earth advocated a ‘soft start’ to the regulations, where a breach would only occur when a property is next let or marketed after the regulations have come into force. The hard start could put local authorities in the position of having to investigate existing tenancies (which might not even have an EPC) to find out whether they are in breach of the regulations.
Property industry working parties have been set up by DECC to advise on possible regulations, one for residential property and one for non-residential property. Members are drawn from a range of stakeholders, including tenants, lawyers, trade associations and environmentalists. Secretariat services are being provided by the British Property Federation. Tom Younespour, senior policy officer for the BPF, says: ‘The BPF considers that the working parties will report to the government in the summer, and that the reports will inform the formal consultation expected towards the end of the year. Interested parties are encouraged to look out for the consultation and respond with comments.’
The DECC website states that the government intends that properties rated F and G will be caught by the Energy Act regulations. However, until the regulations are published, solicitors cannot give meaningful advice to their clients on this point.
The act does not specify whether energy performance certificates are to be used, although there are no alternatives which are widely available at the moment. Younespour comments that ‘debates in parliament discussed that properties should achieve E or better on an EPC, but the discussion was mainly focused on residential properties. There are significant complexities relating to the non-domestic property sector, and part of the working group’s remit is to consider exactly what the right threshold should be for non-residential property. No doubt this issue will form part of the consultation document.’
Many commercial leases already in place will continue beyond 2018 and therefore will be caught by regulations which do not yet exist. The effects of this will start to be felt very soon.What is clear is that reforms are afoot. Landlord and tenant clients should be alerted to the issues, particularly for less energy-efficient properties. Certainty on the best course of action will need to wait, for the time being at least.
- Rent reviews will be affected by the energy efficiency of the property, both after 2018 and (if the lease will expire after 2018) before then.
- Depending on the wording of the regulations, leases may become void for illegality. If the tenant then remains in occupation paying rent, will a periodic tenancy be created? What impact will this have on security of tenure, registration at the Land Registry and the payment of stamp duty land tax? How will landlords’ mortgagees react?
- Tenants should not assume that landlords will have to pick up the bill. The lease may contain a statutory compliance covenant, which could oblige the tenant to carry out improvements so that the premises comply with the regulations. Alternatively, any Green Deal costs might fall within the charges which can be passed on to tenants.
- If the landlord has to carry out work to the premises to re-let them following expiry of the existing lease, section 18 of the Landlord and Tenant Act 1927 will come into play.
- The effect on renewals within the security of tenure provisions of the Landlord and Tenant Act 1954 is unclear.
Suzanne Gill is a partner specialising in property law