Frequently asked questions about the new energy performance regime
Ten years ago, energy performance certificates (EPCs) were largely seen as nothing more than a box ticking exercise but that is fast becoming a distant memory with the impending arrival of Minimum Energy Efficiency Standards (MEES). From April 2018, it will be unlawful for a landlord to grant a new lease, or to renew an existing lease, of commercial premises that have a "substandard" EPC rating of F or G. From April 2023, MEES will make it unlawful to "continue to let" substandard commercial premises. Simon Keen and Jane Dockeray answer some of the questions about the new regime.
Q: What are the exemptions from MEES?
Even if a building is required to have an EPC the landlord may not need to comply with MEES if:
a) leases are for less than six months or more than 99 years; or
b) the work required to achieve the minimum energy efficiency standard does not satisfy a seven year payback test (i.e. that the works pay for themselves in energy savings in seven years).
Additionally, there are some temporary exemptions lasting five years. These apply where:
c) all the relevant energy efficiency improvement works have been made by the landlord (or none can be made) and the property is still sub-standard; or
d)third party consent is required (e.g. tenant, mortgagee or local authority) but cannot be obtained despite the landlord's reasonable efforts; or
e) the works would lead to a reduction in market value of five per cent or more.
There is also a six month temporary exemption which applies in certain limited circumstances where the landlord has become a landlord suddenly or it would be inappropriate for it to be required to comply with the MEES Regulations immediately. Such circumstances include lease renewals under the 1954 Act, the grant of a lease due to a contractual obligation, leases created by operation of law and leases granted by court order.
Q: What will happen on a 1954 Act protected lease renewal when a unit is rated as F or G? Can the landlord refuse to renew the lease?
Where a tenancy benefits from the protection of the 1954 Act, the tenant has a right when the lease ends to remain in occupation and to be granted a new lease. The 1954 Act trumps MEES so the landlord may not refuse consent to the lease renewal even if the property is substandard and therefore illegal. Nor may a tenant use a landlord's failure to comply with MEES as a reason to terminate the lease prematurely. A temporary, six month exemption may be available for the landlord during which works can be carried out to improve the EPC rating or a further five year exemption may be claimed if available. The temporary six month exemption must be registered and is only available if the renewal is pursuant to the 1954 Act. The trigger for the MEES regime is the grant of the renewal lease not the expiry of the old one as the old lease is deemed to be continuing for 1954 Act purposes.
Q: If the lease is not protected by the 1954 Act, will a tenant of substandard premises have to vacate on a lease renewal whilst the landlord does the work?
If the tenant is in occupation then it might be possible to register and rely upon one of the five year exemptions such as the consent exemption.
If no five year exemption can be claimed, then the works will need to be undertaken by the Landlord. Granting the renewal lease under an Agreement for Lease could allow a temporary, six month exemption to be registered and relied upon, whilst the works are carried out. The landlord could grant a tenancy at will whilst he carries out the works depending on what works have to be done to increase the EPC rating.
Q: When does the exemption need to be registered for a 1954 Act lease renewal where the tenant will remain in the premises pending grant of the renewal lease?
If a consent exemption is applicable then that can be registered as soon as the facts allow and will continue to apply for five years. So long as the renewal is completed within those five years it can be relied upon for the purposes of the renewal. The consent exemption is available for both protected and non-protected lease renewals.
If no other exemption is available at the point of renewal, then a temporary six month exemption will be needed. This is only available for 1954 Act renewals. To avoid a breach of the MEES Regulations, in theory this exemption must be registered before the renewal lease is granted. However it is not clear whether this will be possible. As the register does not yet exist we do not know whether it will be possible to register a temporary exemption before the renewal lease has been granted.
Q: What if the unit is in shell condition with an F & G rating prior to letting?
For existing properties, wherever possible, the landlord should obtain an EPC while the previous tenant is in occupation so that the rating can be prepared using that tenant's fit-out and not an assumed worst-case fit out when the property is in shell condition. The change of tenant and the stripping out of a unit is not necessarily the trigger for a new EPC to be obtained, so the historic (but still technically valid) EPC can be used on a reletting.
If you cannot avoid an EPC with an F or G rating (for instance on new builds) then the parties could enter into an Agreement for Lease. The grant of a lease pursuant to a contractual obligation allows the landlord to rely (subject to registration) on a temporary six month exemption. The Agreement should oblige the tenant to complete its fit-out within six months, after which a new EPC with a higher rating could be obtained. You would need to be sure that the fit-out would improve the rating and that the new EPC is obtained. Alternatively, the landlord may prefer to undertake the necessary works to increase the EPC rating before granting the lease or allowing the tenant into occupation.
Q: If the tenant permits the landlord entry to improve EPC ratings (with the landlord undertaking the works), can the landlord recover those costs from the tenant?
If the lease does not specifically state that works will be done at the tenant's expense, then the question of who pays for the works will need to be negotiated with the tenant. A landlord will want to seek recovery of these costs from the tenant, particularly if the tenant benefits from any consequential energy savings.
Note that if the tenant grants consent to the works, it is unlikely that the landlord will be able to rely upon an exemption, unless some other consent is required (e.g. planning consent) and cannot be obtained.
Q: If third party consent exemption needs to be relied upon, what steps are needed to show that reasonable efforts have been made to obtain that consent?
The MEES Regulations require the landlord to make "reasonable efforts" to obtain third party consent. Reasonable efforts may include attempts on separate occasions and using different means of communication.
In the case of planning consent refusal, evidence of a single application and subsequent refusal is likely to be sufficient evidence.
The MEES Regulations state that any notice seeking consent to make an improvement must be made in writing and may be sent by post. E-mail and other electronic communication will also be acceptable. Where there is a lease or other document in place, the notice must be served in accordance with its terms.
Where the notice is sent to a company, the MEES Regulations state that it may be addressed to the secretary or clerk, although it would be best practice for the party in question to send any correspondence to the most relevant contact at the organisation, including any named individual with whom the landlord typically corresponds.
Where a notice or other communication is sent to a partnership, the MEES Regulations state that it may be addressed to any partner or a person who has control or management of the partnership business but, again, if the lease specifies how notices must be served then its requirements should be followed.
Q: What are the requirements for listed buildings?
It is not clear whether listed buildings do or don't need an EPC. The test is whether "compliance with certain minimum energy performance requirements would unacceptably alter the character or appearance" of the building but it is not clear how to meet the test without getting an EPC and therefore knowing what works need to be done.
The most sensible course of action for listed buildings seems to be:
- To obtain a draft EPC and understand what the rating is likely to be; and
- if it's an E or above, lodge it and ignore the listed building issue; but
- if it's an F or G, review what measures need to be taken to improve the rating and consider which can be implemented.
Q: On reversionary leases, when is the EPC rating taken?
A reversionary lease (a lease that takes effect when an existing lease has expired) granted after 1 April 2018 will be subject to MEES. The EPC rating at the date on which the reversionary lease is granted will therefore be relevant. If the premises are substandard on 1 April 2018 then improvement works will need to be carried out before granting a reversionary lease after that date otherwise an exemption will be needed.
From 1 April 2023, where a reversionary lease has already been granted, the landlord must consider whether it is "continuing to let the premises" and whether those premises are substandard. If the premises are substandard under the existing lease then the landlord will need to comply with MEES for that lease and the reversionary lease will take care of itself but there may be anomalies. In short, always consider MEES, particularly after 2023.
Q: Are there any "quick wins" in improving the EPC rating?
There is no single quick win as this will depend on the asset but the three biggest influences on an EPC rating are: lighting; presence of an air supply and/or extract system; and insulation. Improvements to these can provide "common wins".