4 January 2018

Asset Management Q&A

Q: I own the freehold of a listed building which I intend to let on a commercial lease. I have just obtained and registered an EPC.  The EPC rating for the building is F. What, if anything, do I need to do?

A: Domestic and non-domestic properties in England and Wales require the production of an energy performance certificate (“EPC”) on construction, sale or letting, save for where a specific exemption applies. This may include, in certain circumstances, listed buildings and buildings in a conservation area. Failure to provide an EPC when required is unlawful, and can incur a fine of between £500 and £5,000.

With effect from 1 April 2018, the Minimum Energy Efficiency Regulations (“MEES”) will require a minimum EPC rating of E for all new leases, and for renewals or extensions of existing leases. From 1 April 2023 in respect of non-domestic properties, and from 1 April 2020 for domestic properties, landlords may not continue to let sub-standard properties, even to existing tenants. If they do, although it will not invalidate the lease itself, they will be liable for a fine of up to £150,000.  MEES will only apply to those buildings which require an EPC.

Are listed buildings automatically exempt from the requirement to obtain an EPC?

No. The Energy Performance of Buildings (England and Wales) Regulations 2012, as amended (the “EPC Regulations”), set out when an EPC will be required. They do not specifically refer to listed buildings or buildings in a conservation area as being exempt from the EPC requirements. Rather, Regulation 5(1)(a) states that the obligation to produce an EPC does not apply to buildings which are “officially protected as part of a designated environment or because of their special architectural or historical merit, in so far as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance”.  However, the EPC Regulations do not define the scope of what amounts to “minimum energy performance requirements” and the application of this exemption is therefore unclear.

The Government has sought to clarify matters in its updated EPC guidance issued on 11 December 2017, which provides that buildings within a conservation area and listed buildings may be covered by this exemption, but repeats the qualification that it will only apply where the character or appearance of the building would be unacceptably altered following compliance with “minimum energy performance requirements”. The updated guidance attempts to illustrate what would amount to such “minimum…requirements” by suggesting that many EPC report recommendations, such as double glazing, new doors and windows, external wall insulation and external boiler flues, would result in such unacceptable alterations. However, it goes on to provide that building owners will need to form their own view and suggests that advice is sought from the local authority’s conservation officer where there is doubt.

In your scenario, you have obtained an EPC when potentially none is required. It has registered an F rating which, with MEES set to bite in April 2018, prompts concern. It would be advisable to seek further clarification from a qualified EPC assessor and, possibly, the conservation officer, to determine whether the building is exempt from the need for an EPC on sale/letting.

Does MEES apply to listed buildings?

If an EPC is required, MEES will apply. If the EPC assessor and/or conservation officer determine that the building does not qualify for the exemption referred to above, MEES will apply. This means that, in order to grant a new lease from April 2018, you will need to carry out improvement works to increase the EPC rating to E or above. This applies even if you are unable to afford the works, subject to certain exemptions briefly summarised below. Note that exemptions must be registered on a central government Register, cannot be transferred to a new landlord and will apply for 5 years.

The Exemptions

  1. Seven-Year payback test, i.e.: the energy improvements will not pay for themselves through energy savings over a seven-year period.
  2. Devaluation of the property by more than 5% which may be caused by the recommended improvements.
  3. Refusal of third party consent (such as from tenants, superior landlords or planning authorities).
  4. Recently becoming a landlord (this exemption applies in specific circumstances).

If, as above, the EPC assessor/conservation officer concludes that an EPC is not required for the building, MEES should not apply.

Does it matter that  we have registered an EPC on the register, even though it is not legally required?

For the purposes of MEES, no, it shouldn’t. The Government guidance suggests that MEES will not apply where an EPC is not legally required, even if one was obtained voluntarily by the landlord and registers a sub-standard rating.  However, a low EPC rating may prompt concern from an incoming purchaser or tenant (and there is no way to distinguish between a “required” and “voluntary” EPC simply by looking at the register). It is therefore advisable to obtain evidence from an EPC assessor/ conservation officer who has assessed that EPC, confirming that it is not legally required.

What if I hadn’t registered the EPC?

If there is any doubt as to whether a listed building needs an EPC or not, it is worth considering commissioning an EPC in draft form only. An assessor/ conservation officer can then comment on the results and registration of an EPC be undertaken only if the conclusion is that it is required. If there is no EPC, and you can evidence that none is legally required, then MEES is a non-issue.

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