Paul Darvill explains how ‘Energy Performance Certificate’ regulations could affect a popular pension scheme investment.
There are some major changes being implemented by the Department of Business, Energy & Industrial Strategy (BEIS), coming into effect from 1 April 2018.
The changes mean that it will be unlawful to newly let or lease a residential or commercial property with a poor Energy Performance Certificate (EPC).
An EPC gives a property an energy efficiency rating from A (the most efficient) through to G (the least efficient) and is valid for a 10-year period.
Impact on pensions
Clearly, these new regulations will have an impact on the SIPP and SSAS sector. These schemes are popular and have become mainstream due to the investment flexibility that they provide, and are products that can invest in bricks and mortar.
With less than a year to go, advisers are contacting their clients, updating them on these changes and the likely impact it will have on them.
This is a new area of the law and BEIS has published guidance on the new Minimum Energy Efficiency Standards (MEES). The first material date of 1 April 2018, for new lettings, is drawing ever closer, and all lettings will be impacted from 1 April 2023.
What is clear from the guidance is that existing EPC exceptions will still apply under the new MEES regulations, and these include:
• Small self-contained buildings (under 50sqm)
• Places of worship
• Buildings with no heating or cooling, and
• Majority of listed buildings.
From 1 April 2018, the following lettings are also excluded:
• Lettings for less than six months (where the tenant has not been in occupation during the preceding 12 months), and
• Leases with a term of more than 99 years.
Where an energy efficiency rating is less than an E, the landlord will be required to undertake energy improvement work. These must be cost-effective and based on a seven-year payback mechanism. Energy improvement work typically includes:
• Improvements to the -insulation of walls
• Roofs and windows
• More efficient heating, cooling and lighting systems
• Energy metering, and
• Installation of renewable energy resources.
Even after the landlord has undertaken these improvements, it is not certain that the building will reach an energy -efficiency rating of E. Where this is the case, the landlord will be required to repeat the assessment process again in five years’ time.
There are some exemptions to this, but they are not a complete get-out-of-jail-free card as they will last for only five years, after which a new exemption must be applied for. These include:
• All cost-effective works have been carried out
• Where works will devalue the property
• Where insulation works will damage the property, and
• Where a landlord is unable to obtain the necessary consents to undertake the works from either a tenant under an existing lease, a lender or a planning authority where planning permission is required.
Enforcement
The new regulations are set to be enforced by Trading Standards. The penalties are civil ones, not criminal, and up to a maximum of 20% of the rateable value of the property, which is capped at £150,000.
Where clients have a lease that exists beyond 1 April 2023, it is important to let them know that they will require a Schedule of Approved Works in place.
In addition, for any new leases being granted, it would be worth checking if the term will continue beyond 1 April 2023. Where this is the case and the energy efficiency rating is below E, a Schedule of Approved Works will need to be agreed at the outset.
When new commercial property is being purchased, the cost implications of MEES will need to be factored in to the offer price for property below a Schedule E rating.
Paul Darvill is administration and technical director at Talbot and Muir
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