One out of every five commercial properties in England and Wales will potentially become unlettable overnight when minimum energy efficiency standards (MEES) come into force next year.
From 1 April 2018 it will be unlawful to grant a lease of a property with an EPC rating of F or G, and five years later this will extend to existing leases already in place.
Within the last fortnight the Government has issued guidance on how the new scheme will work in practice for non-domestic property.
Will all commercial leases be subject to MEES?
We already knew from the minimum energy efficiency standards regulations that leases not exceeding six months or for 99 years or more will be exempt, but the guidance confirms that MEES will not apply to:
- properties that do not require an EPC, even if an EPC has been obtained voluntarily
- properties where the EPC has expired, at least until a new EPC has to be obtained for a new letting by the landlord or a subletting by the tenant
- the grant of a licence rather than a lease
The guidance does however suggest that an EPC is required in some situations where previous EPC guidance suggested that an EPC was not required, which will bring more lettings within the scope of MEES:
- the guidance confirms, as has long been suspected, that not all listed buildings and buildings within conservation areas are exempt from requiring an EPC, only those where carrying out energy efficiency improvements would affect its character or appearance
- the guidance suggests that an EPC is required on a lease renewal with the sitting tenant
Does the guidance resolve the conflict between MEES and business lease renewals?
Lease renewals are affected from 2018, so if a five-year lease of an F-rated property was granted in 2014 it will be unlawful for the landlord to renew that lease in 2019. The guidance confirms that a landlord cannot use MEES to refuse to grant a renewal lease to which the tenant is entitled under the Landlord and Tenant Act 1954, but advises that in those circumstances the landlord can obtain breathing space to comply (whether by carrying out works to reach the minimum standard or registering a full exemption) by claiming the six month exemption for ‘new’ landlords.
Is there any guidance on the various exemptions that a landlord may be able to claim?
The landlord does not have to upgrade the property to E or above if:
- all cost effective works have been carried out (or there are no cost effective works that can be carried out)
- it would devalue the property by more than 5%
- the landlord cannot obtain all necessary consents to carry out the works (perhaps from a superior landlord, mortgagee or tenant, or planning permission
All exemptions have to be recorded on a public register and the guidance gives more detail on what is expected. So, to demonstrate that works are not cost effective (based on a simple seven-year payback period) the landlord is expected to file three quotes and its calculations, while lack of consent will generally require the landlord to have requested consent on ‘a number of separate occasions’ using ‘a number of different available means of communication’. While these exemptions generally last for five years, a buyer of tenanted property cannot rely on exemptions registered by the seller and an exemption based on lack of tenant consent must be reassessed on each change of tenant within the five year period.
How will penalties for breach of the MEES regulations be enforced?
The guidance confirms that MEES – like EPCs – will be enforced by local weights and measures authorities, probably through Trading Standards. Enforcing authorities will have 12 months from the date of a suspected breach to serve a compliance notice and 18 months to issue a penalty notice. Fines can reach £150,000 per breach for commercial properties, which will mount up if the landlord has granted several leases within the same sub-standard building or across several sub-standard properties. Landlords also face being named and shamed through the use of publication penalties in addition to fines.
What questions are left unanswered by the guidance?
The guidance is a useful reminder of the basic principles of the MEES scheme and clarifies many of the practical issues around compliance and enforcement. Inevitably it does not attempt to address the position between landlords and tenants, thus leaving unresolved the thorny issue of whether landlords will be able to flush their costs of compliance through the service charge or even possibly force tenants to carry out the works. The guidance also sheds no light on whether (or, more likely, when) the minimum standard is likely to be ratcheted up from E to D. This will be determined by the five-yearly reviews starting in 2020, but landlords may wish to futureproof themselves now by doing more than the bare minimum. We must also assume from the very fact that the guidance has been published that the government remains committed to a scheme rooted firmly in the EU Energy Directive.
For those with a particular interest (or who struggle to get to sleep), the full 71 pages of guidance can be found here.
This article originally featured on Place North West.