New environmental legislation is endeavouring to make the UK an even greener and more pleasant land.
The effect of the “minimum energy efficiency standards (MEES) for private rented buildings” will shortly start to affect both commercial and domestic let premises and landlords may want to start taking action now to mitigate the impact. This note focuses solely on commercial premises.
From 1 April 2018 it will be unlawful to let a premises with an EPC rating of less than an “E”. The Government estimates that 18% of properties are non compliant so this could affect quite a number of landlords. The effect of the regulations is to require the landlord to carry out works to the relevant premises to ensure they have at least an “E” rating. Failure to do such works before granting a lease could result in the landlord being “named and shamed” on a public register as well as fines of up to £150,000, depending on the rateable value of the premises.
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From 2023, if the premises are below an “E” rating, the works must be done whether or not there is a renewal i.e. mid-term of any lease.
There are a few exceptions to these obligations, the principal ones of benefit being:
- the landlord is unable to obtain the consents it needs to do the works (whether from the local authority, lender, superior landlord, tenant or otherwise); or
- the improvements will result in a drop in value for the premises of more than 5%,
but in each case evidence must be filed on a public register to prove that the exception has been complied with and the exception is also not “once and for all”, meaning the landlord must try again in the future to get the consents.
It is no excuse to say that the works will cost too much or that the landlord lacks the financial means to carry them out.
The regulations do result in some tricky issues for landlords, some of which we have set out below:
- Where a tenant is renewing its lease, the requirement to do the works still applies but the landlord may not be able to physically carry them out while the tenant is in occupation. Presumably, a tenant will not want to move out of the premises and may not want the disruption caused by the works. The fact that the tenant therefore prevents the landlord doing the works should fall into the “consents” exception above but should landlords be seeking to insert a right to enter the premises into any renewal lease? For a renewal under the Landlord and Tenant Act 1954, would this be “reasonable updating”? We would assume so but the position is not known.
- Can landlords recover the cost of doing any improvement works from their tenants? If there is a service charge then it will depend on the precise wording of the clauses but landlords may want to consider making changes to their forms of lease to make the ability to recover explicit. Will tenants agree to this? If there is no service charge, because it is a lease of whole, there will likely be no ability to recover from the tenant. The tenant may be under an obligation to comply with statute but this will not help the landlord since the regulations impose the duty on landlords, not tenants.
- What if the main reason for the poor energy efficiency is the tenant’s air conditioning units and these just serve the premises and belong to the tenant? Must the landlord replace/upgrade them?
- If a tenant wants to underlet its premises after 2018, it will have to carry out any necessary works to improve them but it may not have the ability to do such works as they may have to be carried out on parts of the building outside its demise and yet the superior landlord will not be under an obligation to do any works until 2023. However, from 2023, will both the head tenant and freeholder be liable for the fines or just one of them? Which?
- If the tenant wants to make alterations to the property (e.g. a new fit-out), the landlord will want to be sure that the works do not have the effect of triggering the regulations by turning what was previously an “E” rated property into an “F” or a “G”.
Action to take now
As suggested above, we think landlords should be looking at their premises now and possibly obtaining EPCs so that they are aware of the position long before 2018. (However, not having an EPC is another exception to having to carry out works, but surely forewarned is forearmed?)
If landlords know in advance whether or not their properties might need work doing they can budget and plan for this and discuss with their tenants how this might be done. They can also make amendments to their forms of lease to change the service charge, and rights of entry clauses. If leases are coming up for renewal, landlords should be looking to make similar changes. All of this may be relevant on a sale or refinance of a property since potential buyers and lenders may be put off by an energy rating of less than an “E” and this could affect value.
If any works are done to a building, a landlord would be wise to ensure that its contractors are under obligations not to reduce the building’s energy rating and maybe also to improve it. A new EPC should be obtained after the works are complete so that the authorities know the correct rating for the property and that the landlord is not in default.
So whilst the proposed changes may make ours a more green and pleasant land, the impact could be quite unpleasant and costly for property owners.