March 2014 CHPK Newsletter

Welcome to the March 2014 edition of the CHPK Newsletter.

Some in the industry are fairly cynical about green issues, however whether you like it or not we will see more and more regulation in relation to making our building stock more energy efficient. For that reason, it is vital that your professional advisors are up to date with all relevant regulations so they can not only prevent you falling foul of the law but advise how you can implement the regulations to your benefit.

This Newsletter will focus on the Energy Act 2011 which many are not familiar with but is certain to have an impact on all property owners and investors.

We hope you find this Newsletter helpful. If you have any questions on the topics raised please contact us.

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The Background

UK Regulation in relation to energy consumption in property is constantly changing or being adapted and much of this is driven by the European Energy Performance of Buildings Directive (Directive 2010/31/EU).

The built environment represents 40% of the European Union's (EU) total energy consumption. Reducing energy consumption in this area is therefore seen as a priority by the European Union in order to reduce overall energy consumption.

In summary, this Directive obliges each member state to adopt, either at national or regional level, a methodology for calculating the energy performance of buildings which takes into account certain elements, specifically:

  • the thermal characteristics of a building (thermal capacity, insulation, etc.);
  • heating insulation and hot water supply;
  • the air-conditioning installation;
  • the built-in lighting installation;
  • indoor climatic conditions.
  • The positive influence of other aspects such as local solar exposure, natural lighting, electricity produced by cogeneration and district or block heating or cooling systems are also taken into account.

It is this directive that directly led to the introduction of the Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007. This regulation brought in the requirement for buildings to have an Energy Performance Certificate (EPC).

The ultimate target of the EU Directive?

"By 31 December 2020, all new buildings shall be nearly zero-energy consumption buildings. New buildings occupied and owned by public authorities shall comply with the same criteria by 31 December 2018".

The Commission encourages the increase in the numbers of this type of building by putting in place national plans, which include:

  • the Member State's application in practice of the definition of nearly zero-energy buildings;
  • the intermediate targets for improving the energy performance of new buildings by 2015;
  • information on the policies and financial measures adopted to encourage improving the energy performance of buildings.

The Energy Act 2011

Since the introduction of EPCs all purchasers or tenants know up front how the building will perform in terms of energy consumption; however this does not in itself do anything to improve the situation and therefore does not help achieve the ultimate target of the European Directive - hence the Energy Act.

The Act has many facets to it. For example it introduces a new Energy Company Obligation (which replaces the Carbon Emissions Reduction Target and the Community Energy Saving Programme) along with the highly promoted Green Deal scheme. It also makes it illegal for Landlords to refuse a tenant's reasonable request for consent to make energy efficiency improvements to a property.

However it is Section 49 of the Act which relates to the minimum energy performance that potentially has the biggest impact upon our clients. This section of the Act states that the Secretary of State must make secondary regulations by April 2018 which will make it illegal to let any commercial or residential property which does not meet a minimum energy efficiency rating. Until the secondary regulations are made the minimum energy efficiency level is not confirmed but it is expected to be set at an E rating. If this proves to be correct, if you own any property which is currently rated F or G, you will not be able to let the property. This is not expected to be restricted to new lettings but also apply to continuing lettings; therefore even if your property is already let by April 2018, if the EPC rating is below the minimum level, you would be breaking the law. The minimum energy efficiency level is also likely to be increased at regular intervals, making this a moving target.

It is worth noting that April 2018 is a longstop date and therefore the secondary regulations may come into force earlier.

To give you an idea of the implications of this, it is currently estimated that 20% of the UK commercial stock have an F or G rating.

The Act is likely to be enforced by the Local Authority, and although the fine for residential properties is limited to £5,000.00 no limit has been stipulated for commercial premises.

Common and yet unanswered questions over this legislation and the secondary legislation are:

  • Will leases become void due to illegality of the letting? Will tenant therefore be able to break leases and walk away and how will this impact mortgages or other financing?
  • If a tenant is in place, does the landlord have the right to enter under the lease to carry out the necessary works to improve the efficiency rating?
  • Who should pick up the bill for the works? Would a tenant's "Compliance with Statute" clause in a lease allow the landlord to pass the obligation on to the tenant?

There are likely to be a few caveats to these regulations. For example the Government has indicated the improvements must be able to be achieved via the Green Deal scheme. This scheme requires the improvements to be proved economically viable before the building is eligible.

We would recommend that all our clients review the energy performance of their portfolio now to assess the implications of these far reaching regulations.

If you would like any further advice, please contact us.