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Looming EPC deadline

LANDLORDS now have only a narrow window to ensure their properties have a minimum Energy Performance Certificate of E or above, warns commercial property agent Prop-Search, or face holding unlettable properties in their portfolios as new legislation comes into force.

From 1 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 new lease, 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: “The most obvious threat this brings to landlords is the financial cost of upgrading non-compliant buildings and the potential loss of income if a property cannot be rented out. And while commercial buildings can still be sold, the majority of lenders will not, or will be very reluctant to lend on premises which are effectively unlettable.”

Landlords can let a building to which the Minimum Energy Efficiency Standards apply, but which is below the minimum standard, if any of the exemptions apply. These are:

The Golden Rule: where an independent assessor determines that all relevant energy efficiency improvements have been made to the property, or that improvements that could be made but have not been made would not pay for themselves through energy savings within seven years.

Devaluation: where an independent surveyor determines that the relevant energy efficiency improvements that could be made to the property are likely to reduce the market value of the property by more than five per cent.

Third Party Consent: where consent from persons such as a tenant, a superior landlord or planning authorities has been refused or has been given with conditions with which the landlord cannot reasonably comply.

Exemptions must be registered on the Central Government PRS Exemptions Register. They are valid for five years only and cannot be transferred to a new landlord.

Samantha Jones added: “Some lettings will not trigger an obligation to carry out works, namely short-term lettings of under six months or for leases of more than 99 years, however the regulations do 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 per cent of the rateable value of the property, rising to £10,000 or 20 per cent 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 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 6 April 2014, which mean that properties that have already been assessed for an EPC could be re-assessed at lower ratings.

Samantha Jones said: “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.”

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. Further information or advice can be obtained from Prop-Search on 01933 223300 or 01604 492000 or at www.prop-search.com

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