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Minimum Energy Efficiency Standards – Common Landlord questions

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Summary: From 1 April 2018 the Minimum Energy Efficiency Standards (“MEES”) restrict Landlords from granting tenancies of both commercial and residential property where the energy rating is below an E. In the first of this three part series we look at the regulations themselves and in parts 2 and 3 we will consider some practical solutions to common scenarios in a commercial and residential context.

The EPC regime has now been in force for a number of years and this has created a bank of data about properties in the UK for Government to attempt to leverage to encourage improvements in the energy efficiency of buildings.

The Energy Efficiency (Private Rented Property) (England & Wales) Regulations 2015 will introduce minimum energy efficiency standards for domestic and non-domestic rented properties in England and Wales.

These regulations mean that, from April 2018, there will be a new required minimum standard for energy efficiency of privately rented commercial buildings.  The required standard is “E” or above on the Energy Performance Certificate (EPC) sliding scale.  Data from the first quarter of 2017 showed that 12% of commercial properties for which EPCs were produced during that period were F or G rated and therefore non-compliant.

Effect

From 1 April 2018: landlords are not be able to lawfully let a commercial or domestic property which has an EPC rating of F or G.  This includes the renewal or extension of an existing lease, including compulsory statutory renewals. 

From 1 April 2020: landlords will not be able to continue to let a domestic privately rented property in England and Wales, where the EPC rating is F or G, even where there has been no change in tenant arrangements.

From 1 April 2023: landlords will not be able to continue to let a commercial privately rented property in England and Wales, where the EPC rating is F or G, even where there has been no change in tenant arrangements.

What is a tenancy

MEES will apply on the grant of any new lease including subleases and reversionary leases, surrender and regrants and sale and leasebacks; as well as to lease renewals, both within and outside the protection of the 1954 Act.

However the regulations do not apply to licences to occupy as a licence to occupy does not create a proprietary interest in land. Nor do they apply to an agreement for lease, as the regulations require a lease to have actually been granted. 

With regards residential tenancies the regulations apply to assured tenancies as defined under the Housing Act 1988; regulated tenancies as defined pursuant to the Rent Act 1997; or certain agricultural tenancies.  All other residential tenancies will be outside the scope.  Part 3 of this series will look in more detail at which residential tenancies are caught. 

Exclusions

Leases granted for a term of less than 6 months or more than 99 years do not come within the scope of the MEES regulations.  A lease granted for 6 months with a right to renew/extend the term will however be caught by the regulations.  The regulations also apply to a tenancy granted for 6 months where, at the time the tenancy is granted, the tenant has been in occupation for a continuous period which exceeds 12 months.

A property which does not require, and is not part of a building which is required to have an EPC will also be outside the scope of MEES as well.  

  • Properties without roofs or walls.
  • Detached properties under 50m2.
  • Buildings earmarked for demolition.

Where an EPC has been obtained voluntarily for a property which is exempt from having to have an EPC (i.e. a church, temporary building, or holiday let) MEES will not apply to it. 

Exemptions

There are a number of exemptions which a landlord may apply for – they must be lodged online before the grant or renewal of the lease.  The online register allows landlords to self-certify for an exemption by providing the relevant evidence. An exemption is available where:

  • all improvements have been made or there are no improvements which can be made;
  • the landlord can evidence that the capital cost of the relevant improvement measure does not satisfy a seven year payback test in terms of energy cost savings;
  • the improvement measure will devalue the property or the building of which it forms part by 5% or more; or that installing cavity wall insulation will damage the fabric of the building;
  • the landlord has not been able to improve the energy efficiency of the property because it has not been able to obtain a third party’s (such as a tenant, superior landlord, funder  or statutory body’s (e.g. planning authority)) consent to carry out the necessary improvement measures, despite using reasonable efforts to do so;
  • consent from a tenant may include consent to carry out works within their demise, within common parts or to access their demise to carry out works to another tenant’s demise / the common parts;
  • there is also a temporary 6 month exemption where the landlord is a “new landlord”.  It applies until 6 months after the date on which the landlord becomes, or continues to be the landlord of the property. Examples include:
    • where a landlord has purchased a property subject to an existing lease;
    • the grant of a lease pursuant to a contractual obligation – including an agreement for lease for example; or
    • a 1954 Act renewal.

Enforcement

Enforcement will be by trading standards bodies who will have the power to serve penalty notices where they believe that an E or G rated property has been unlawfully let.

Indications are that there will be government funding for local authorities to assist with enforcement and it is likely that this will be relatively high on their agenda as it is very easy to establish which properties are substandard (by reference to EPCs which have to be publically registered).

It is worth noting that a breach of the regulations does not affect the validity of the lease. The penalties are both financial and reputational.

Financial:

  • for a breach lasting less than 3 months, the amount is £5,000 or 10% of the rateable value of the Property, whichever is greater (up to £50,000);
  • for a breach of 3 months or more, the amount is £10,000 or 20% or the rateable value of the Property, whichever is greater (up to £150,000).

This applies per breach (i.e. per lease granted in contravention of the regulations).

In addition the trading standards bodies may publish details of breaches.

Conclusion

The impact of the MEES regulations will be met over time by landlords as new leases are granted and others come up for renewal.

Property lenders are paying close attention to MEES and factoring ratings into bank valuations.  There is already evidence of price chipping and transactions terminating where an EPC rating is below an E.

In part 2 we will look in more detail at how landlords and tenants can protect their positions with regards MEES and some issues that may arise in connection with a landlord’s property portfolio.

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