New energy efficiency regulations are in place that may prevent a landlord renting out a building with an energy efficiency rating of F or G.
From 1 April 2018, both residential and commercial landlords have had to ensure that their properties meet the Minimum Energy Efficiency Standards Regulations 2015 (MEES). If a landlord holds an EPC showing an energy efficiency rating of F or G for their property, they now cannot grant a new tenancy. This will include extending or renewing an existing tenancy. In addition, it will cover the situation where a fixed term tenancy has expired and becomes a periodic tenancy. There are some limited exemptions to this and they are set out below.
The position will become more onerous as landlords will not be able to continue an existing tenancy of a property with a rating of F or G as follows:
- From 1 April 2020 for residential property.
- From 1 April 2023 for commercial property.
Whilst there is no positive obligation to improve their property, if a landlord wants to let space that falls below the threshold, alterations must be made to bring the energy efficiency rating up to the minimum level of E.
Enforcement of MEES is explained below.
Tenancies not covered by MEES
There are some tenancies that are not covered by MEES:
- Residential property – although Assured Shorthold Tenancies are covered, long residential leases and lettings by public landlords such as government departments, local authorities and housing associations are exempt.
- Commercial property – short-term lettings of under six months and leases of more than 99 years. MEES will apply in the majority of cases as it is relevant to those properties that are let on a tenancy and are required to have an EPC. In the case of a not-for-value transaction, such as an intra-group letting, an EPC is not required. MEES may not apply for an intra-group letting, unless an EPC has previously been obtained for the property.
Some have suggested that a way around MEES might be to allow occupation pursuant to an agreement for lease or a licence. However, it is not advisable for a landlord to rely on these in order to avoid complying with MEES. An agreement for lease will not give the tenant certainty as to their right in the property and will mean the value of the landlord’s asset will not reach its investment potential and it could breach the landlord’s mortgage conditions. In relation to a licence, while a document can purport to be a ‘licence’, if in reality it gives a tenant exclusive possession of a property, it is a lease and MEES will apply.
The following exemptions, which apply to both residential and commercial property, can be utilised by landlords:
- Consent exemption – where consent for the works from a third party cannot be obtained, or, in the case of consent from a superior landlord, consent has been given subject to conditions that the landlord cannot reasonably comply with.
- Devaluation exemption – where the work needed to bring the property up to an ‘E’ rating would result in more than a 5% reduction in the value of the property (as confirmed by a report from an independent valuer).
- Temporary exemption – certain temporary exemptions are available to a landlord until six months after whichever is the later of the date on which a landlord becomes or continues to be the landlord by way of an obligation set out in MEES or a court order is made for the grant of a lease not under the Landlord and Tenant Act 1954.
For residential properties (not commercial properties), there has been guidance from the Government to confirm that landlords will only be required to make improvements where they use entirely third party finance. This can be from one or more sources and does not depend on the landlord being able to raise money on the open market. The landlord simply has to be unable to obtain funding from a statutory source or elsewhere at no cost to the landlord. There is the potential that most landlords of residential property will come within the scope of this ‘no cost to Landlord’ exemption.
Note that an exemption, including the ‘no cost to landlord’ exemption, only applies if it is registered with the PRS Exemptions Register (click here for: PRS Register).
The landlord or the tenant can undertake the works to bring the EPC rating to E or above before the lease is granted. The lease could be drafted to state that the tenant will pay for the works, either directly or via a service charge. Whilst most leases contain an obligation for the tenant to comply with statute, this should not be relied upon to ensure the necessary works are undertaken. This is because MEES does not impose a positive obligation to carry out works.
Validity of a Lease
A lease granted over a property which does not satisfy MEES and any provision of the lease is not affected by the breach. However, the landlord will be liable to enforcement action. In addition, a tenant who accepts such a lease and wishes to sublet will find it difficult to find a sub-tenant.
Penalties can be imposed on landlords who are in breach of MEES. For a residential property, the financial penalty will not exceed £5,000 in total, but for a commercial property it could be as much as £200,000.
Landlords should review their portfolios and continue to do so to check the need for compliance with MEES.