Under The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the MEES Regulations), from 1 April 2018 it will be unlawful for a landlord to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property), unless an exemption has been registered.
What is the impact of the MEES Regulations where an agreement for lease in respect of a sub-standard property is exchanged before the 1 April deadline? Will the landlord have to comply with the MEES Regulations if completion of the lease takes place after 1 April?
Relevant date is the grant of the lease
The relevant date under the MEES Regulations is the date of the grant of the lease (i.e. completion of the lease itself, not exchange of an agreement for lease). There is no exception for leases granted after 1 April 2018 pursuant to agreements for lease which exchanged before that date. Therefore, if completion occurs on or after 1 April 2018, the MEES Regulations will apply regardless of whether there was a prior agreement for lease. However, where the lease is granted pursuant to a contractual obligation such as in an agreement for lease, it may be possible for the landlord to benefit from a temporary exemption in order to make the letting lawful (see 'Register an exemption' below).
Landlords and tenants currently negotiating agreements for lease which may not complete before the end of March (for example, because they are conditional on planning permission being obtained or works being carried out) must consider the impact of the MEES Regulations.
As a first step, the EPC rating of the premises should be checked. If the current rating is below ‘E’ then action should be taken to ensure there is no breach of the MEES Regulations.
What could the landlord do?
Completion of the lease could be brought forward to before 1 April 2018. Whether this is commercially viable will depend on any other conditions which need to be met before the parties are comfortable committing themselves to a lease (for example, planning permission or a premises licence being obtained).
However, even if it is commercially viable to complete the lease early, this may only be a temporary fix. If the term of the lease will extend beyond 1 April 2023 (or 1 April 2020 for domestic properties), then at that date the MEES Regulations will prohibit the landlord continuing to let (as opposed to granting a new lease of) a sub-standard property, unless an exemption applies and has been validly registered.
The parties could agree to include a longstop date of 31 March 2018 in the agreement for lease, after which either party may walk away if the conditions for the grant of the lease had not already been satisfied. This would allow either party a way out of the deal and avoid any breach of the MEES Regulations if it became clear that it would not be possible to complete the lease before 1 April 2018. However, from a commercial perspective this would put both parties back to square one.
Energy efficiency improvement works
Energy efficiency improvement works could be undertaken at the premises in order to bring the premises up to at least an ‘E’ rating.
The responsibility for carrying out such works and the cost of them would be a matter for negotiation, but both are likely to fall on the landlord given that a tenant will be reluctant to incur expenditure to help a landlord comply with its MEES obligations unless perhaps the premises are the only suitable premises currently available to the tenant.
The timing of the works would also need to be considered. Will they be carried out before an agreement for lease is exchanged, or after? A landlord will often prefer for the tenant to be committed to the premises before it incurs significant expenditure on works, but in this instance the premises will be unlettable unless the energy rating is improved. Therefore, a landlord may be prepared to proceed speculatively given that the works will need to be carried out before any letting proceeds. However, a tenant may be keen to secure the premises and therefore happy to enter into an agreement for lease conditional on the works being carried out (and a new EPC being obtained) before completion.
Register an exemption
Certain exemptions are available to make lawful lettings which would otherwise be unlawful under the MEES Regulations, provided the relevant exemption has been registered in the Private Rented Sector exemptions register. One such exemption is where a landlord is subject to a contractual obligation to grant a lease. This would allow a landlord to register an exemption in circumstances where an agreement for lease is exchanged before 1 April 2018, but the lease will be completed on or after that date. Whilst on a literal interpretation of the MEES Regulations this would apply to both existing and new landlords, there is a suggestion in the government's guidance that this exemption would only be available to those landlords who inherit a contractual obligation to grant a lease by, for example, buying a property which is already subject to an agreement for lease. If it does apply, the exemption would need to be registered to be effective and would only last six months from the date of the letting. At the expiry of that six-month period, the landlord will either need to have brought the rating up to at least an 'E', or registered a longer term exemption, if available (such as a lack of the necessary consents needed to carry out energy improvement works, or that carrying out such works would cause a significant devaluation of the premises).
Tenant to look elsewhere
The tenant may wish to consider taking alternative premises available on the market which might be more energy efficient. Where the tenant is obtaining funding, its lender's requirements in relation to the MEES Regulations will also need to be considered and may rule out one or more of the options discussed above.
Above all, the parties cannot ignore the impact of the MEES Regulations on their transaction, even where they will have concluded an agreement before the Regulations come into force on 1 April 2018.