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Minimum Energy Efficiency Standards - Key provisions

EPCs and “sub-standard” properties

The Minimum Energy Efficiency Standards (MEES) regulations set out the minimum level of energy efficiency for private rented property in England and Wales. A property will currently be deemed to be “sub-standard” for the purpose of the MEES regulations if it has an Energy Performance Certificate (EPC) rating below E, although there is scope for the standard to be raised over time.

Property owners will be familiar with the requirement to provide a valid EPC to a purchaser or tenant when a property is let or sold. The EPC does not need to be a “new” EPC, as an EPC remains valid for a period of 10 years (assuming that the property is not substantially altered and / or a new EPC is not obtained in that period). It is not necessary to “renew” an EPC at the end of the 10 year period (unless a new EPC is required in connection with a new sale or letting) and it is not necessary for all properties to have a valid EPC.

To date, the EPC rating and recommendations have served simply as useful indicators of the environmental efficiency of a property. However, come April 2018 and the introduction of the MEES regulations, the EPC rating for a property will become far more significant.

New restrictions on letting sub-standard properties

The following key provisions are set out in the MEES regulations and will apply to the letting of both commercial and residential properties, subject to the exceptions and exemptions outlined further below:

From 1 April 2018 A landlord may not grant, extend or renew a lease of a residential or commercial property if the property has a sub-standard EPC rating.

From 1 April 2020 A landlord may not continue to let a residential property which is already let if the property has a sub-standard EPC rating.

From 1 April 2023 A landlord may not continue to let a commercial property which is already let if the property has a sub-standard EPC rating.

Properties that are not subject to the MEES regulations

The MEES regulations will not apply to buildings that do not require an EPC namely, industrial sites with a low energy demand, places of worship, small standalone buildings (total floor area of less than 50 square meters) and temporary buildings. The position regarding listed buildings remains unclear.

Lease types that are not subject to the MEES regulations

The MEES regulations will not apply to leases of a term of less than 6 months or leases for a term of 99 years or more and will not apply where a party occupies premises under a licence agreement or agreement for lease.

In addition, the MEES regulations will only apply to residential premises that fall within the statutory definition of an assured tenancy or a regulated tenancy (or certain forms of agricultural tenancies). Accordingly, the regulations will not apply to residential leases with a rent of more than £100,000 pa, or less than £1,000 pa (£250 pa if outside of Greater London).

Exemptions

A landlord may grant a new lease of a sub-standard property after April 2018, and may continue to let a sub-standard property after April 2020 (residential property) or April 2023 (commercial property) provided that it can claim one of the following exemptions:

High cost exemption: Where the potential value of energy efficiency improvements would not exceed a 7 year payback period.

Impact on value exemption: Where undertaking energy efficiency improvements would decrease the capital value of the property by more than 5%.

Consent exemption: Where a landlord requires the consent of a third party (such as a superior landlord, mortgagee, planning authority or a tenant) to undertake energy efficiency improvements and such consent cannot be obtained despite the landlord’s reasonable efforts to obtain it.

New landlord exemption: Where a landlord is required to grant a new lease of a sub-standard property pursuant to an agreement for lease, or following a tenant’s insolvency or pursuant to a court order (including a statutory renewal under the Landlord and Tenant Act 1954).

Each of the above exemptions must be registered on the public PRS exemptions register in order to be valid. With the exception of the new landlord exemption (which applies for 6 months) the exemptions will apply for 5 years. At the end of the 5 year period the landlord will again be required to improve the EPC rating so that the property is no longer sub-standard or register another valid exemption.

Exemptions will not pass to a new owner on the sale of the property. If a let property with a sub-standard EPC rating is sold with an exemption in place the exemption will cease to be effective, and the new owner will either need to undertake the necessary improvements to improve the EPC rating or register its own new exemption (within a 6 month “grace” period from the date of purchase).

Penalties

New leases that are granted, and existing leases that are continued in breach of the MEES regulations will remain valid and will not be liable to termination as a result of the breach. However, a landlord may face a potential fine of up to £150,000 if it is found to have breached the MEES regulations and breaches will be published on the public PRS Register.

Identifying sub-standard properties

Landlords will need to take steps to address which properties, if any, within their portfolio may be sub-standard and assess the steps that may need to be taken to ensure that any such properties can continue to be let beyond 2018 in compliance with the MEES regulations.

MEES clauses for leases

Whilst we have yet to see the emergence of a set of “standard” MEES clauses in new commercial or residential leases, some landlords and tenants are starting to revise and adapt lease clauses to cater for the MEES regulations when negotiating a new lease. The nature of such clauses will vary depending on the current EPC rating for the property to be let and the bargaining strengths of the parties to the lease.

Properties with a good EPC rating: If a property has an EPC rating of E or above, the landlord will not envisage the need to access the property to undertake energy efficiency improvements and the landlord’s primary concern will be to ensure that a good EPC rating is maintained and that its tenant is not able to alter the property so as to adversely affect the EPC rating.

Properties with a sub-standard EPC rating: If a property has a sub-standard EPC rating the landlord’s primary concern, if granting a new lease without first improving the sub-standard EPC rating, particularly if the lease is for a term that runs beyond April 2023, may be to ensure that the landlord can access the property during the term to undertake any necessary energy efficiency improvement works and recover the cost of all such works from its tenant. In contrast, the tenant may be alert to the potential disruption that agreeing to such a provision may cause to its occupation and may be keen to avoid any liability to contribute towards such costs via the service charge or otherwise.

Whilst some landlords (usually those with a very strong bargaining position) may have introduced clauses to pass the tenant all costs of energy improvements to bring the property to the minimum EPC standard, or indeed an obligation on the tenant to undertake such works, such clauses may not be acceptable to the majority of tenants and, unless expressly excluded may have a detrimental impact on rent review.

 

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