The rules around minimum energy efficiency standards (“MEES”) come into force on 1 April 2018. From this date, a landlord will be unable to let a property that has an EPC with a rating below an E unless one of the exemptions in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 applies. From 1 April 2023, a landlord will be in breach of the regulations if it continues to let a property that has an energy rating below an E. Any lease will still be valid between the landlord and the tenant even if the landlord is in breach of the regulations on letting the property or continuing to do so.
Exclusions & Exemptions
If a property does not have an energy performance certificate (“an EPC”), then the regulations will not apply to it.
The regulations do not apply to short leases (defined as less than 6 months) or long leases (greater than 99 years).
The key exemptions where property with a low energy rating can be let are:
- all cost effective improvements, being works that would pay for themselves through energy savings within seven years, have been undertaken, or there are no such works that could be done;
- a landlord is unable to obtain third party consent, for example from the planning authority, lender, superior landlords or consent from the tenant under a lease to enter the property to carry out improvement works;
- an independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% (such as providing thermal insulation to the internal face of external walls) or would damage the property.
Exemptions last for 5 years and to qualify for an exemption a landlord must register the exemption that it is relying upon.
Where a landlord buys a property already subject to leases, or where a landlord is required to grant a lease pursuant to a statutory or contractual obligation to do so, such as on a lease renewal, the landlord is not in immediate breach of the regulations. It has six months to comply or to determine that one of the principal exemptions apply – exemptions do not pass from one landlord to another.
Model Commercial Lease Provisions
The industry standard model commercial lease now includes the following provisions to deal with the MEES regulations:
- a right for the landlord to enter the premises to carry out energy efficiency improvement works, if the tenant in its absolute discretion consents (if the tenant doesn’t consent, the landlord can rely on the exemption);
- an obligation on the tenant to pay the costs of those energy efficiency improvement works (as it will be the tenant who benefits from energy savings);
- a prohibition on alterations that would otherwise be permitted if those alterations would adversely affect the environmental performance of the premises;
- restrictions on the tenant preventing it from obtaining an EPC unless it must do so by law (e.g. on assignment or underletting). This is to avoid the possibility that the EPC that the landlord holds for particular premises is replaced by a later EPC with a rating below an E;
- a rent review assumption that the premises may be lawfully let at the rent review date. When dealing with lease renewals it may be best to settle for the provisions from the MCL which are middle ground between landlord and tenant.
Additional & Alternative Lease Provisions
Depending on the over-arching aim of either landlord or tenant further and additional lease provisions might be included to deal with MEES issues. With no settled industry practice as yet, so far we have seen within drafted documents:
- an additional tenant’s covenant requiring the tenant to carry out any works required by MEES;
- an agreement by the landlord not to look to recover the costs of any works required by MEES from the tenant;
- a tenant’s yielding up covenant requiring the premises to be returned with no lesser EPC rating than the rating at the start of the lease, or no lesser EPC rating than an E;
- a landlord’s right to break a lease if to continue letting the premises would place the landlord in breach of the MEES regulations.
Action to take
As many leases that are being granted or taken now will continue beyond 1 April 2023, or though short term, will have rights to renew beyond 1 April 2023, landlords and tenants are encouraged to address the issues of MEES by way of lease drafting or amendments now. The approach of both landlords and tenants will vary greatly depending on the nature and type of property involved and future plans. We would be happy to discuss the best approach for you and your property portfolio, to explain the ramifications of the regulations more fully, and to work with you to draft lease provisions to suit your situation. Please do get in touch.
NOTES This note is intended as general guidance and is not a substitute for detailed advice on specific circumstances. It reflects the position as we understand it as at May 2016.