In 2018, new regulations governing energy efficiency standards, known formally as the Energy Efficiency (Private Rented Sector) (England and Wales) Regulations, will come into force.
The new regulations will require owners of privately rented property to have a minimum energy efficiency rating of an E on the Energy Performance Certificate (EPC).
Scope and exclusions
These new regulations, known more commonly as the minimum energy efficiency standards or “MEES”, will affect both commercial and domestic privately rented properties. MEES was initially introduced in March 2015 as a means to improve energy efficiency in rented buildings.
Subject to certain exceptions (detailed below), on or after 1st April 2018, it will be unlawful for Landlords to grant any new lease or renewal on a commercial or domestic property where the energy efficiency grading is an F or below. There is a transitional period however for any existing leases; these will not be captured by the new regulations until April 2023, when MEES will apply for all leases.
In the context of commercial property, MEES applies for tenancies granted for a term between 6 months and 99 years. The regulations will apply to standard full repairing and insuring (FRI) leases but also apply to multi-lets and sublets.
- Where the Landlord can show that they have made improvements which are cost effective by showing either that the works will achieve a pay back within seven years, or that the “golden rule” on the Green Deal plan is satisfied; or
- The Landlord is unable to obtain all consents required third parties to carry out improvement works; or
- The improvement works will cause the value of the property to decrease by 5% or more
If an exemption applies, according to the new rules, this must be logged on the “Private Rented Sector (PRS) Exemptions Register”. However, this will expire after a period of 5 years and the exemption will not transfer to the new owner if the property is sold.
The rules apply similarly in the case of domestic property, they exclude property falling within the scope of a “Listed Building” (defined by section 1(5) of the Planning (Listed Buildings and Conservation Areas) Act 1990 as “a building which is included in a list compiled or approved by the Secretary of State”.
Should a property fail to meet the required standards, Landlords will incur a minimum penalty of £5,000. Renting out a non-compliant property will incur a penalty, which will depend upon how long the lease has been non-compliant. For up to 3 months’ noncompliance this will be up to 10% of the property’s rateable value (with minimum and maximum penalties of £5,000 and £50,000 respectively), rising to 20% of its rateable value thereafter (with increased minimum and maximum penalties of £10,000 and £150,000 respectively). However, there is some leeway; from the date of any new tenancy, Landlords will be entitled to a 6 month extension before the property must be compliant.
How does this affect me?
According to recent statistics, up to 18% of non-domestic property is graded an F or G on the EPC*. The impact of this legislation is therefore potentially very significant for anyone granting or taking a new lease of commercial property.
If you are about to take a new lease of commercial property you would be well advised to ensure that the Landlord takes action if the property has an energy efficiency rating of F or G. At the very least agreement should be reached with the Landlord to ensure that you are not liable for any works to improve the energy efficiency rating of the property during the term of the lease.
* Private Rented Sector Minimum Energy Efficiency Standard Regulations (Non- Domestic) (England and Wales)