The government has published the long-awaited guidance on the Minimum Energy Efficiency Standard for non-domestic properties.
The Minimum Energy Efficiency Standard (MEES) for both domestic and non-domestic properties comes into effect on 1 April 2018 - just over a year away. From that date, landlords will not be permitted to grant a lease of a property with an EPC rating of F or G unless they have made all possible cost-effective energy efficiency improvements, or one of the exemptions applies. For this purpose, 'cost-effective' broadly means that an improvement pays for itself within seven years. We wrote about MEES in our article 'Minimum Energy Efficiency Standard: preparations investors and landlords should be considering now'.
The regulations that bring MEES into effect - the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 - are complex and difficult to understand. The guidance that was recently issued by the Department for Business, Energy & Industrial Strategy is therefore very welcome, as it sets out for the first time in plain language the steps that landlords are required to take in order to comply with the new requirements. The guidance considers only non-domestic properties - broadly commercial buildings although the term is wide enough to include any buildings that are not individual dwellings (described as 'domestic properties'). We are told that guidance on domestic properties will be published separately.
The guidance follows the regulations
Most of the contents of the guidance are what one would expect, echoing the provisions of the regulations. There has been some criticism that the guidance does not provide answers to some issues on which the regulations are unclear. By way of example, what works is a tenant supposed to carry out when it wishes to sub-let, when all the possible energy efficiency improvements relate to the landlord's part of the building? And what constitutes 'reasonable efforts' in the context of applying for consent to carry out works? That is not a fair criticism of the guidance. It is exactly that: guidance, not law, and can only reflect the content of the regulations. Ultimately the courts, not the government, will decide these issues.
One corollary to this is that in cases where the regulations make no sense, the guidance cannot improve the situation. For example, two of the six month exemptions in regulation 33(2), which allow a temporary exemption of six months, have been mangled. Similarly, in relation to listed buildings and properties within conservation areas, the drafting of the relevant provision in the Energy Performance of Buildings (England and Wales) Regulations 2012 as to when an EPC is needed is confusing and circular. The guidance can do no more than repeat the confusing wording. Again, this is something the courts will almost certainly need to look at, as there is no indication from the government that it is prepared to revisit the wording of the 2012 regulations. In the meantime, as the guidance states, owners of listed buildings and properties within conservations areas will need to take legal advice on how MEES applies to them.
As well as spelling out the requirements of the regulations in a logical manner, the guidance also draws attention to some provisions in the regulations that might not have been immediately obvious. Examples include:
- Lettings not licences: the guidance says in paragraph 1 that licences and agreements for lease will not trigger MEES, although it rather ruins it by the use of the phrase 'unlikely to be required to meet the minimum standard'. It is difficult to think of any circumstance in which a genuine occupational licence would be within MEES.
- No EPC for a property on 1 April 2023: There is no specific requirement to obtain a new EPC where one expires before 2023. An example on page 20 makes clear that if an EPC has expired in 2022, there will be no duty to carry out works on 1 April 2023 (the start of the second phase) unless and until a new EPC is needed for a sale or letting, or major modifications to the building have been made that trigger the need for a new EPC (which would be unusual).
- Demonstrating there are no possible cost-effective works: if a landlord wishes to rely on the exemption that the seven-year payback rule is not satisfied, it needs to obtain three quotes to demonstrate this (this requirement is actually set out in the schedule to the regulations, which lists the contents of the exemptions register). There is clearly going to come a time when contractors are going to refuse to quote for jobs, if they believe their quotes are merely going to be used as evidence to be posted in the exemptions register.
- Packages of energy efficiency measures: landlords are encouraged to consider packaging up works, but when it comes to calculating whether a particular measure passes the seven year payback test, each measure is to be considered individually.
How reliable is the guidance?
The guidance states on a number of occasions that it does not constitute legal advice - but still one would expect it to reflect accurately the contents of the regulations. However, there are a couple of occasions at least where this does not seem to be the case:
- Tenant consent exemption: the guidance states that this exemption ceases to be available when the current tenancy ends or the current tenant assigns his lease - this is not entirely clear from the wording of the regulations, and may need to be considered by the court
- Voluntary EPCs: the guidance says that voluntary EPCs do not lead to the requirement to comply with MEES, which has raised some eyebrows. The difficulty is that it is unclear exactly what the guidance means by 'voluntary EPCs' - EPCs for buildings that are exempt from the need for them in the first place (such as places of worship) or EPCs obtained by owners who had no intention of selling or letting at the time when the EPC was obtained. It would be odd if the second category of 'voluntary' EPC means that owners do not need to comply with MEES, as it could spotlight a very simple avoidance technique. Just obtain an EPC when you do not need to obtain one, and there would be no need to comply with MEES - even, apparently, when a letting is contemplated. Surely this cannot be the government's intention and it certainly is not what the regulations themselves say. Some further guidance is certainly needed here.
The publication of this guidance is timely. Landlords have only a little over a year now to ready themselves in time for the first MEES deadline of 1 April 2018. Given that the penalties are potentially as high as £150,000 in certain circumstances, these new requirements need to be taken seriously.
We have not yet been told what is to happen to the penalties that local authorities (the enforcement authorities) are expected to levy under MEES. If it turns out that they are permitted to retain the proceeds of penalties (as opposed to passing them to the Treasury), we can expect a much more rigorous enforcement regime than we have seen with EPCs in the past.