From 1 April 2018, under The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (MEES Regulations), it will be unlawful for a landlord to grant a new tenancy of a sub-standard property unless an exemption has been validly registered on the PRS Exemptions Register.
A sub-standard property is a property with an EPC rating of below E.
There are various circumstances in which an exemption could apply. In this legal insight we look at situations where consent is required but cannot be obtained, where the works could result in a reduction of the market value of the property, and when a temporary exemption could apply.
The consent exemption
If a landlord is unable to carry out works to improve the energy efficiency of a sub-standard property because the consent of a third party is required, and cannot be obtained, the landlord will be able to let the property provided that it has registered the exemption on the PRS Exemptions Register.
The situations in which this exemption may apply include where the property is let to a tenant and the landlord needs the tenant to allow it access to the demised premises to carry out works. However, the prohibition that comes in on 1 April 2018 is on granting a new tenancy of a sub-standard property. Consequently, we are unlikely to see widespread use of this exemption, in relation to tenants, for some time. It will become far more common from 1 April 2020 (for domestic properties) and 1 April 2023 (for non-domestic properties) when it becomes unlawful for a landlord to continue to let a sub-standard property unless an exemption has been validly registered.
However, other third party consent could be required. For example, from a lender, superior landlord or planning authority. Where the landlord has made "reasonable efforts" to obtain this, and it has not been forthcoming, the landlord may be able to register an exemption. In order to register the consent exemption, the landlord will need to provide copies of correspondence and documents evidencing that consent was sought, and was refused (or granted subject to a condition with which the landlord could not reasonably comply). This information must be registered before the landlord lets the property.
The devaluation exemption
A landlord is permitted to let a sub-standard property if a relevant energy efficiency improvement would result in a reduction of more than 5% in the market value of the property, or the building of which it forms part. The landlord must have a report from an independent surveyor setting this out, and this report must be submitted when registering the exemption. As for all exemptions, the landlord will only be able to rely upon the devaluation exemption, if it has been registered on the PRS Exemptions Register.
It is difficult to think of many cases in which energy improvement works will reduce the market value of the property. However, if the works would reduce the lettable space within the property, the market value could be affected. It will be interesting to see how widely this exemption is relied upon.
The MEES Regulations acknowledge that there are situations in which a landlord may need a grace period to enable it to comply with the legislation. The list of circumstances in which a temporary exemption can be registered is set out in regulation 33, and includes:
- Where a lease is granted pursuant to a contractual obligation. This could include where a lease is granted pursuant to an agreement for lease.
- Where a new lease is deemed to have been created by operation of law. This may include situations where a fixed term assured shorthold tenancy is converted to a statutory periodic assured shorthold tenancy.
- Where a renewal lease is granted under the Landlord and Tenant Act 1954.
- From 1 April 2020 (for domestic properties) and 1 April 2023 (for non-domestic properties), if a landlord buys a tenanted sub-standard property, it will be able to register a temporary exemption.
A landlord can only rely on a temporary exemption if it registers it on the PRS Exemptions Register. The exemption will only last for six months. After that, the landlord will either have to show and register a longer-term exemption (typically exemptions last for five years), or show that the property has an EPC rating of E or above.
What action is required?
A landlord will only be able to let a sub-standard property on or after 1 April 2018 if an exemption applies and has been validly registered. Action to register an exemption needs to be taken now, before the lease is granted. Once an exemption has been registered, landlords cannot sit back and relax. If a landlord is relying on a temporary exemption, it will only last for six months, so the landlord will need to consider what it needs to do to comply with the MEES Regulations after the expiry of that six month period. Even longer term exemptions will expire after five years so landlords need to diarise when they will lapse and have an action plan for ensuring that they are not in breach of the MEES Regulations. Breach could result in hefty fines and reputational damage.
TLT has a dedicated MEES hot topics page and is able to advise you on all aspects of the MEES Regulations. For details of the exemption that could apply if the landlord has undertaken all "relevant energy efficiency improvements" (or there are none that could be made) and the property still has an EPC rating of below E, see our legal insight – MEES: Have you carried out all relevant energy efficiency improvements?