As of 4 January 2009, the transitional period for providing an Energy Performance Certificate (EPC) has come to an end. As such, an EPC must be provided for a number of commercial property transactions.
This update follows on from our previous article entitled “Commercial Buildings Must Go Green”. The law governing the need to provide an EPC on the marketing, sale and leasing of commercial properties has now come into effect. This update seeks to give some guidance on when an EPC must be provided and the limited circumstances in which one may not be needed.
When is an EPC needed?
The EPC requirement is triggered by the sale, lease or underlease of a “building”. The requirement is also triggered on the marketing of a property for any of these purposes. A “building” is defined as being “a roofed construction having walls, for which energy is used to condition the indoor climate, and a reference to a building includes a reference to a part of a building which has been designed or altered to be used separately”.
Therefore, if you are selling or letting a property which has no form of conditioning the indoor climate, whether for cooling, heating, or otherwise, an EPC will not be required. A property which has electricity and hot water does not necessarily fall within the Regulations and an assessment of whether the indoor climate is conditioned in anyway will need to be carried out.
Who pays for the EPC?
The Regulations governing the requirements for EPCs provide that the EPC must be made available to the prospective buyer or tenant free of charge. Therefore, the burden of arranging the EPC to be provided falls on the person selling or letting the property.
At which stage in the transaction must the EPC be supplied to the prospective purchaser/tenant?
The EPC must be provided before the transfer or lease is completed and in any event must be provided before any contract to sell or to rent is entered. It is prudent to provide an EPC at the time of marketing the property depending on the circumstances.
Who prepares the EPC?
A seller or landlord will need to instruct a qualified EPC provider/assessor. A lot of surveyors and agents have obtained the qualifications required to carry out an energy performance assessment. Please do not hesitate to contact us should you require the details of some of our recommended EPC providers.
What information will the EPC provider need to complete the assessment?
EPC assessors will take into consideration all information relating to the building. As a seller or a landlord, it would be prudent to keep all plans, specifications, and other details such as information on the heating systems and energy supplies available to provide to the EPC assessor.
Is an EPC required on assignment or underletting of a lease?
The Regulations would view the assignment of a lease, or the grant of an underlease, as a sale or letting for the purposes of providing an EPC. An EPC must therefore be provided in these situations.
Who must provide the EPC on an assignment or underletting?
As with the grant of any lease or the sale of the property, it is the party who is selling or granting the lease that must provide, and therefore pay for, the EPC.
Is an EPC required for the whole building or just the subject property?
On an assignment or an underletting of part of a building, it may be possible to arrange for the party who is assigning, or granting the underlease to request that the landlord provide an EPC for the whole building. Alternatively, the seller or the tenant granting the underlease can arrange for an EPC for just the part of the building being rented.
EPC considerations for landlords on assignments or underlettings
An EPC is valid for 10 years and may adversely affect the market value of a property. For example, the EPC may give a very poor rating for the energy efficiency of a building and the recommendations report may suggest substantial works need to be carried out at the property to make it more energy efficient. This in turn would mean that a purchaser or a tenant may require a reduced purchase price or rent for the property. Any new EPC will supersede a previous EPC.
If you are a landlord on the grant of a lease, licence to assign, or a licence to underlet you may wish to prohibit the tenant, assignee, or undertenant from obtaining an EPC during the course of the term. Alternatively, you may require that the assignor, or tenant provide you with the new EPC that they obtain during the course of the assignment or underletting.
In what circumstances does an EPC not have to be provided?
An EPC need not be provided if it is reasonable to believe that the prospective buyer or tenant does not have enough money to buy or rent the property. Similarly, an EPC does not need to be given to prospective buyers or tenants if the property fits the general description of the type of property in which the prospective buyer or tenant is not genuinely interested.
The government guidance also provides that an EPC does NOT need to be provided for the following transactions (amongst others):
(1) Where a lease is granted in a situation where the tenant occupied the property prior to 1 October 2008 and continues to occupy the same property under the lease;
(2) Lease renewals or extensions;
(3) On effecting a compulsory purchase order;
(4) Lease surrenders;
(5) Where a company which owns property is purchased by way of a share sale (as distinct from a purchase of the company’s assets);
The guidance suggests that there are other transactions where an EPC will arguably not be required, but these are assessed on a case by case situation.
How long does the EPC last?
As mentioned above, an EPC will remain valid for 10 years unless it is superseded by a more recent EPC for the same property.
Therefore, if you are the landlord of a 5 year lease starting in December 2009, and you provide an EPC at the time of marketing that property, when the term expires you will not need to provide a new EPC to any prospective new tenants for the property. In this instance, the old EPC can be used for the marketing of the property prior to the grant of a new lease to a new tenant or a sale of the property.
What are the penalties for not providing an EPC when one is required?
Under the Regulations relating to EPCs, there is a civil (as opposed to criminal) liability penalty for not providing an EPC.
The civil penalty comprises a fine of 12.5% of the rateable value of the property (subject to a minimum of £500 and a maximum of £5,000) when an EPC is not obtained on the sale or lease of a commercial property. There is a default penalty of £750 when the rateable calculation cannot be applied.
Are records of EPCs retained on a national database?
EPCs are stored on a national register against their unique reference number and the EPC provider/assessor’s accreditation number. This register can be accessed at www.epcregister.com. The register will show all of the EPCs for each property from the last 20 years, however, only the most recent EPC for a property will be valid.
Is the production of an EPC enforced in the UK?
Enforcing the production of an EPC on the sale or letting of a property is the responsibility of the Trading Standards Office. The Trading Standards Officer can request a copy of the EPC for a property for a period of up to six months after the sale or letting took place. If you are a landlord, or a seller, it is advisable to keep a copy of the EPC or at the least the reference number so that it can be obtained from the register when requested.
Failure to produce an EPC and the recommendations report (see below) when requested by an Officer will result in the civil penalty outlined above.
Are there any circumstances when a penalty for non-compliance may be avoided?
There are two distinct situations in which a penalty notice can be avoided under the Regulations:
(1) Late Performance – This only applies only when an EPC has been requested at least 14 days before it was required but was not received by the time it was needed. This provision is aimed at protecting landlords or sellers who have commissioned an EPC as necessary but have been unable to get one on time as a consequence of the EPC provider’s late performance. The provisions require that the landlord/seller must undertake all reasonable efforts and enquiries to obtain the EPC in a timely manner. Therefore, it is not sufficient to just show that the EPC was requested 14 days in advance of the time it was needed. One must show that they have also regularly chased their EPC provider to obtain the EPC
(2) Emergencies - This is available to Landlords only (as opposed to sellers) who may avoid a penalty when all four of the following events occur:
(a) An emergency had meant that the tenant had to urgently relocate;
(b) The landlord didn’t have a valid EPC;
(c) There was insufficient time for the landlord to obtain a valid EPC; and
(d) An EPC was supplied as soon as reasonably practicable after completing the new lease.
What is the Recommendations report?
The recommendations report will be provided by the EPC assessor and accompanies the EPC. The recommendations report sets out the repairs and improvements that can be made to the property in order to make it more energy efficient.
Do the recommendations contained in the report have to be followed by a landlord?
These are recommendations only and therefore will not need to necessarily be followed by the landlord. However, there has been some suggestion that over time, the energy efficiency of buildings will be taxed as part of a new environment preservation tax regime. Although there is no such proposed tax or suggested tax in place at the present time, it seems likely that the government are using the EPC regulations along with other environmental laws to set the groundwork for putting such a tax in place.
Can the service charge in a lease be utilised for undertaking the works contained in the recommendations report?
Although this is a fairly new area of the law, there seems to be no express restriction upon a landlord carrying out the works recommended in a report and recharging it to the tenant by way of service charge. This would be a commercial matter that would need to be negotiated with the tenant when agreeing heads of terms.
For further information contact Edward Moseley on 01737 854 500 or email edward.moseley@morrlaw.com
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