The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (the MEES Regulations), make it unlawful for a landlord to grant a new tenancy of a property with an EPC rating of below E (a sub-standard property) from 1 April this year, unless an exemption applies and has been validly registered.
If a landlord breaches the MEES Regulations it will not affect the validity of the tenancy, but the landlord could be liable for a fine. So, why should tenants care about the MEES Regulations?
The tenant wants to sub-let
The MEES Regulations apply to the grant of sub-leases. Therefore, if a tenant occupies a sub-standard property, it will not be able to grant a sub-lease unless the premises are improved to an E rating, or the tenant has registered an exemption.
Carrying out works may involve an application for landlord's consent. Where this is not forthcoming, the tenant may be able to register an exemption which will enable it to let the property without improving it to an E rating.
If consent is not required for the works (or the landlord will provide it), the tenant will have to carry out "relevant energy efficiency improvements". For non-domestic properties, broadly speaking, improvements will be "relevant energy efficiency improvements" if they are identified as green improvements and the landlord will be able to recoup the costs of the works within seven years. This is calculated in accordance with the formula set out in the Regulations. If carrying out such works does not result in the property achieving at least an E rating, the landlord will be able to let them provided that it has registered an exemption.
Therefore, even if the tenant does not have to carry out any improvement works, it will, at the very least, have to register an exemption. This could be time consuming and administratively burdensome.
Landlord wants access to carry out works
From 1 April 2023, it will be unlawful for a landlord to continue to let a sub-standard non-domestic property, unless an exemption has been validly registered. The prohibition comes in earlier for domestic properties – from 1 April 2020 it will be unlawful to continue to let a sub-standard domestic property unless an exemption has been validly registered. Therefore, if the term of the lease of non-domestic premises extends beyond 1 April 2023 (1 April 2020 for domestic properties), and there is a valid EPC in place on that date, the landlord will need to improve the property to an E rating, or show and register an exemption.
Depending on the nature of the property, and the works that need to be undertaken, the landlord may need access to the tenant's demised premises to carry out works. Unless the lease reserves a right of access for the landlord to carry out such works, the landlord will need to rely on the tenant granting access. Whether or not a tenant is willing to do so will depend on the nature of the tenant's business. Some tenants will refuse on the ground that it will disrupt their business. Others may be willing to grant access if the landlord provides, for example, a rent free period or alternative premises for the duration of the works.
Landlord seeks to charge tenant for the cost of the works
The landlord may charge the tenant for the cost of energy improvement works via the service charge. The landlord's argument may be that the tenant will benefit from reduced energy bills. However, the tenant's view is likely to be that the landlord is improving the value of its investment so should pay for the works.
Whether or not the landlord can validly charge the tenant for such works will depend upon the drafting of the service charge provisions.
Tenants should check service charge provisions carefully so that they do not end up footing the bill for improvement works that may be of little benefit to them, particularly if they only have a short term interest in the premises.
The landlord may include a provision preventing the tenant from carrying out works that reduce the EPC rating of the premises. Landlords should consider the consequences of doing this, as such a clause may have an adverse impact on rent review.
Tenants should also look carefully at rent review provisions. The inclusion of an assumption that the premises have an EPC rating of at least E could lead to the tenant paying a higher rent than the premises should really command.
Reinstatement at the end of the term
If the tenant has carried out works to improve the EPC rating of the premises during the term, the landlord will want to benefit from the improved EPC rating. Reinstatement may not, therefore, be required.
If the property is sub-standard, the landlord may need to carry out works to improve the EPC rating at the end of the term to enable it to lawfully let the premises. Those works could make any repair works by the tenant unnecessary. The tenant should take advice on the effect of such works on any dilapidations claim.
It is clear that tenants cannot ignore the MEES Regulations. Provisions in leases dealing with the Regulations cannot be viewed in isolation. The impact on other elements of the lease, for example in relation to rent review, dilapidations and reinstatement, needs to be considered. Both tenants negotiating new leases, and those occupying under current leases, are going to be affected by the Regulations. TLT has a dedicated MEES hot topics page, and can advise both landlords and tenants of the implications of the MEES Regulations.