From 1 April 2018 the Energy Efficiency (Private Rented property) (England and Wales) Regulations 2015 impose a new legal standard for minimum energy efficiency which will apply to rented commercial buildings. From this date it will be against the law for a landlord to grant a new lease of commercial property with an EPC Rating of F or G. This will also prevent the granting of new subleases and lease renewals.
From 1 April 2023, it will also be in breach of the law for a landlord to continue to let a commercial property with an F or G Rating. This means that a lease that was legal when granted will become unlawful in April 2023.
These new rules will apply unless the landlord registers an exemption and these are set out below.
These rules were brought in to implement an EU Directive. The Government estimates that 18% of commercial properties hold the lowest Energy Performance Certificate (EPC) Ratings of F or G. These low ratings pose a threat to the UK meeting its carbon reduction targets for 2020 and 2050. While Building Regulations are used to ensure that new properties meet current energy efficiency standards, MEES will deal with the UK’s older buildings.
When does MEES not apply?
MEES does not apply to all commercial properties. Those which are excluded from the Regulations are:
- A building which is not required to have an EPC. This includes industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary buildings, buildings which are due to be demolished and holiday lets.
- A building where the EPC is over 10 years old or where there is no EPC.
- Tenancies for a term of 6 months or less where the tenant does not have the right of renewal.
- Tenancies for a term of over 99 years.
- A building or part of a property occupied under the licence to occupy (assuming that it is truly a licence and not a lease).
In addition, the landlord can let a building free of the MEES regulations in the following cases:
- The landlord has carried out the recommended energy improvement works but the property or building is still in the F or G rating. This has to be determined by an independent assessor.
- All relevant energy efficiency improvements that could be made are deemed financially unviable as they would not pay for themselves through energy savings within 7 years.
- Wall-insulation measures are not required where an expert determines that these would damage the fabric of the property.
- Where an independent surveyor determines that the relevant energy efficiency improvements would reduce the market value by more than 5%.
- Where consent from a person, such as the tenant, superior landlord or planning authority, is required before works can be carried out by the landlord and such consent has been refused or the consent has been given subject to a condition with which the landlord cannot reasonably comply.
Any exemption that applies must be registered on the Central Government PRS Exemptions Register by 1 April 2018.
An Exemption lasts for 5 years and is personal to the landlord making the registration. Accordingly, if the landlord sells the property, the new owner is obliged to apply for a fresh exemption.
A landlord should also be aware that the exemption for lack of tenant consent will only remain valid so long as that specific tenant remains the tenant. Accordingly, if the lease is assigned to a new tenant, the landlord is obliged to obtain consent from the new tenant.
Agreements for Lease
The regulations do not prevent the entering into of an Agreement for Lease between the landlord and a new tenant. It is only the granting of the lease itself that is prohibited if the EPC reveals a Grade F or G property.
For buyers of investment properties:
- The first priority should be to look at the EPC and the Recommendation Report.
- If the seller has relied upon an exemption referred to above, the buyer will need to see full details, for example, a copy of the independent surveyor’s report or copies of the quotes obtained for energy improvement works.
- If the buyer is not intending to do the improvement works required, and an exemption is in place, it will need to check that the exemption still applies and then register its own exemption within 6 months of the purchase.
- If no exemption is available, then the buyer must calculate the cost of carrying out the energy improvement works and consider whether the agreed price is appropriate.
- A lender will of course be very interested to ensure that the property complies with MEES.
For existing landlords:
- The provisions in existing leases may affect the position of the landlord in dealing with the MEES regulations, for example:
- Leases may allow tenants to sublet which could trigger the landlord’s obligations if the EPC provided shows a rating of F or G.
- Lease provisions on service charges may allow a landlord to recover capital expenditure required for improvements from the tenant but the wording in leases on this will need to be carefully considered. A landlord will not be able to recover under an FRI lease of whole (unless there are specific provisions to this effect).
- For a landlord who wishes to make improvements, the landlord may not have the right to enter to install energy efficiency improvements.
- It is likely to be more difficult to sell a property with a sub-standard rating unless it is upgraded. A low EPC rating could also have a major impact on the value of the property and make it more difficult to raise finance against the asset.
- MEES obligations are imposed on the landlord, not the tenant and a landlord will not be able to pass on its obligations under the usual tenant’s covenant to comply with statutes affecting the property.
Penalties for breach of the Regulations
The Regulations will be enforced by the Local Weights and Measures Authorities who are able to enforce civil penalties against the landlord which are set by reference to the property’s rateable value:
- The penalty for renting in breach of the Regulations for less than three months will be 10% of the property’s rateable value, subject to a minimum of £5,000 and a maximum of £50,000.
- After three months, the penalty increases to 20% of rateable value, with a minimum of £10,000 and a maximum of £150,000.
In addition, the landlord’s breach will be published on the exemptions register for a minimum of 12 months.
What is the tenant’s position if there is a breach of the Regulations by the landlord?
- No penalties are payable by the tenant.
- Any lease granted will remain valid and the tenant will continue to be liable to pay the rent and comply with the lease covenants. In addition, tenants will not be entitled to terminate their lease on the ground that the landlord continues to let an F/G rated property unless the lease specifically provided for this.