To help the UK meet its 2020 and 2050 carbon reduction targets and as part of the wider efforts to tackle greenhouse gas (GHG) emissions the Government is seeking to improve the energy efficiency of the privately rented property market; tackling the very least energy efficient properties.
From 1st April 2018, under the Minimum Energy Efficiency Standards (MEES) Regulations, landlords are prohibited from granting a new lease or renewing an existing lease of a commercial property with an Energy Performance Certificate (EPC) rating below E. If the property has an EPC rating of F or G, then works will have to be carried out to bring its rating up to an E or above.
From 1st April 2023, the prohibition will extend to existing leases, as landlords will not be permitted to continue to let commercial properties with an EPC rating below E. Estimates suggest that around 20% of all buildings will fail to meet the minimum standard, so it is important that landlords assess their portfolios.
MEES will apply to all commercial property with the exception of:
- Properties that do not require an EPC, such as:
- industrial sites;
- non-residential agricultural buildings with low energy demand;
- certain listed buildings;
- temporary properties; and
- holiday lets
- Properties where the EPC is over 10 years old (this might occur where an EPC was obtained when required but there is no automatic requirement to have another one produced);
- Properties with no EPC;
- Short term tenancies of less than 6 months (providing there is no right of renewal); or
- Long term tenancies of over 99 years
Even where the MEES regulations do apply, landlords may continue to let non-compliant buildings by relying on the following exemptions:
Seven Year Payback Rule (or the ‘Golden Rule’)
- Landlords will not need to install energy efficiency improvements where the savings achieved over seven years are not greater than (or the same as) the seven year repayment cost of the improvements.
- Similarly, landlords will be exempt where they have made all the relevant energy efficiency improvements to the property that can be made (or there are none to be made) and the property still has an EPC rating of below E.
Exempt from installing wall insulation where an expert advises that it is not an appropriate improvement, as it would damage the fabric/structure of the property.
The landlord is exempt for five years from installing any measures that would reduce the market value of the property by more than 5%.
Third Party Consent
If the landlord is unable to obtain any legally required third party consents (i.e. from superior landlords, other tenants, banks etc.) the landlord will be exempt temporarily.
Recently becoming landlord
If a person becomes a landlord, and meets certain conditions, they are exempt from meeting the minimum standard for a maximum of 6 months from the date on which they become a landlord.
Where a landlord relies on any of the above exemptions then it will be required to notify the PRS Exemptions Register. Failure to do so will render the exemption ineffective and amount to non-compliance with the regulations. Exemptions are non-transferable and will expire after 5 years (unless they are temporary, in which case they will be shorter).
Failure to comply with MEES will result in penalties, as shown in Table 1 below:
From 1st April 2018, a landlord of a non-domestic private rented property with an EPC rating of F or G must not grant a new lease or renew an existing lease of that property until works have been carried out to improve the energy efficiency to a rating of E or above.What should commercial landlords and tenants do now?
From 1st April 2023, a landlord of a non-domestic private rented property with an EPC rating of F or G must not continue to let the property until works have been carried out to improve the energy efficiency rating to an E or above.
Check that your EPC certificate is up-to-date.
It is important that both the landlord and tenant (or their solicitors as the case may be) have regard to the following matters when negotiating and drafting the lease:
- Compliance with statute
- A landlord may argue that the tenant is responsible for bringing the property up to an EPC rating of E due to its obligation to comply with statute. Although a tenant is likely to argue that, the obligation remains with the landlord it may wish to introduce a specific carve out.
- A landlord may wish to extend the repair clause to ensure the tenant is under an obligation to carry out any required energy efficiency works. However, a tenant is likely to resist such a clause, as the minimum standard is likely to rise over time thus potentially creating a significant financial liability.
- Landlords may wish to prohibit any alterations that will have an adverse impact on the energy efficiency of the property.
- Service Charge
- Landlords are likely to want to charge tenants for any works the landlord carries out on the property to improve its EPC rating. Of course, tenants will not want to pay for any works that landlord is required to carry out by law.
- Rent Review
- There are a number of considerations here including that the tenant will not want to pay a higher rent if it paid for the improvements. Additionally, where a landlord is recovering the costs of improvements via the service charge it will not want this taken into account at the rent review as it would likely reduce the rent.
It is imperative that landlords ensure they are fully aware of MEES and its implications. This will enable landlords to plan effectively and make well-informed decisions on how to deal with any potentially non-compliant properties in their portfolio and how to approach lease negotiations.