19 March 2019 - Article
Under the new Minimum Energy Efficiency Standards ('MEES'), landlords cannot grant a lease of a property with an energy performance certificate (EPC) rating of F or G unless all cost-effective works to improve energy efficiency have been carried out or an exemption applies. MEES applies to both residential and commercial properties although has small but significant differences in its application and so this briefing note focuses solely on commercial properties.
From 1 April 2018, MEES applies to all new lettings, and the renewal or extension of existing tenancies. From 1 April 2023 it will apply to all lettings, including existing tenancies.
Who will be affected by the regulations?
Owners of properties which are not required to obtain an EPC ('exempt properties') are not affected. Exempt properties include temporary buildings with a time use of two years or less, small standalone buildings, residential buildings that are used for less than four months a year and with low energy use and some listed buildings.
Landlords of 'non-exempt' properties are required by law to apply for an EPC when the property is sold or rented. Obtaining an EPC will then bring them within the scope of MEES unless the tenancy is less than six months or more than 99 years. Indeed, even when an EPC has been applied for by the landlord voluntarily (i.e. the circumstances triggering compulsory certification have not arisen) or by a tenant (against the wishes of their landlord) this will still trigger the MEES obligations for the property in question.
MEES does not impose obligations on owner occupiers or tenants, although they will become relevant for tenants directly because they wish to sub-let or indirectly because the landlord is seeking to recover at least part of the cost of carrying out the works from the tenant via the service charge.
What are cost effective works?
MEES requires the Landlord to undertake any works that are 'relevant energy efficiency improvements'. These are works listed in Part L of the Building Regulations 2013 which pass the 'seven year payback test' i.e. if the works were carried out, the projected energy cost savings will be less than the cost of works spread over a seven year period.
Does an exemption apply?
An exemption will apply if:
- All cost effective energy saving works have been carried out and the EPC rating is still below E.
- If the landlord can prove they are unable to obtain the necessary consents to carry out the works (e.g. consent of an existing tenant or a mortgagee) or the consent is subject to conditions with which the landlord could not reasonably comply.
- If the works would devalue the property by more than 5%.
- If the works are insulation works which would damage heritage property if carried out.
However, it is important to note that obtaining an exemption is by no means a 'get out of jail free' card. Landlords will need to apply, with sufficient supporting documentation to obtain an exemption and re-apply every five years when the exemption expires. It is likely that exempt properties will be placed on a searchable register available to the public showing that the property is 'substandard'. Consideration should be given as to whether this label may have a negative impact on the rental or capital value of the property.
It should also be noted that exemptions do not automatically pass to new owners on sale of a property or lease. New owners will need to apply themselves, which may cause a delay to the transaction.
Penalties and enforcement
The regulations are going to be enforced by local Trading Standards Officers. Taking on board the rather woeful track record of enforcing the EPC regulations, it is anticipated that enforcement of MEES will be much more rigorous. The burden is on landlords to prove, if challenged, that they have complied with the regulations and if they are unable to do so, they will be given a short time in which to comply or face the penalty. The penalties are based on the rateable value of the property and are subject to a maximum cap of £150,000.
Is minimum compliance enough?
From a commercial point of view it may initially appear sensible for landlords to simply carry out the minimum works, if required, but this will not always be the case. Landlords should consider the fact that the methodology of EPC rating has changed considerably over the past few years and so it is expected that existing ratings may fall when they are next certificated (which needs to happen every 10 years). So it may be that an E rating falls to an F or G. It is also expected that the Government will raise the minimum standard from 'E' to 'D' at some point in the future and so owners of E rated properties cannot be complacent.
It is also the case that sometimes the energy savings afforded by such works can be disproportionately higher than the cost of carrying out the works themselves so it may make good financial sense take the financial plunge and consider investing in energy efficiency measures rather than simply doing the minimum.
Issues to consider
The implementation of MEES will throw up a number of landlord and tenant issues which will need consideration such as:
- Should landlords be able to prevent tenants carrying out any alterations that might affect the EPC rating of the property
- Should there be a landlord's right of access to the premises to allow them to carry out the energy efficiency improvements?
- How much of the cost of the works can the landlord recover through the service charge?
- Should MEES have an impact on rent review?