The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 are set to come into force on 1 April 2018 and will introduce a minimum energy efficiency standard (MEES).

Commercial properties with an ‘F’ or ‘G’ Energy Performance Certificate (EPC) rating will need to undergo works to improve their energy efficiency. Non-compliance with the Regulations could lead to a fine of up to £150,000.

As part of the Government’s drive to comply with European and international environmental sustainability targets, energy-saving ‘green’ policies have spread to commercial property. Although this may seem unnecessary to some, given the potential disruptions and the costs involved, the Government estimates that 18% of privately rented commercial properties have an energy efficiency rating lower than ‘E’.

Timescales

Commercial landlords will need to satisfy MEES by either 1 April 2018 (for new lettings) or 1 April 2023 (for existing lettings). Not all commercial properties are affected however, such as:

  • properties that do not need or do not have a valid EPC;
  • properties that have an EPC rating of ‘E’ or higher do not need to be upgraded yet;
  • the Regulations will only affect privately rented commercial properties situated in England and Wales;
  • leases granted for less than 6 months (unless the tenant has been in occupation continuously for more than 12 months or there is a renewal provision in the lease) or more than 99 years, will not be caught; and
  • buying and selling commercial properties will not trigger landlords’ obligations under MEES (neither will licences).

A commercial landlord will commit a criminal offence if after 1 April 2018 it grants or renews a lease of a property with an EPC rating lower than ‘E’. From 1 April 2023, MEES will apply to all existing leases.

Exemptions

Landlords will be relieved to hear that there are exemptions included in the Regulations. Not all properties can be improved and, in some cases, tenants or lenders will be unwilling to allow improvements to be undertaken.

All exemptions only last for 5 years and must be registered on the PRS Exemption Register. They can be applied for again on expiry of the five year period.

In brief, to qualify for an exemption it must be shown that:

  • The works required to achieve the minimum energy efficiency rating do not pay for themselves over a seven-year period;
  • A third party has prevented the works from taking place by refusing consent (despite ‘reasonable efforts’ to obtain it);
  • The works reduce the property’s capital/rental value by more than 5%;or
  • A landlord is ‘coerced’ into a letting (e.g. due to a contractual arrangement).

Next steps

Landlords with properties that fall within the scope of MEES should consider making improvements now as the obligation to comply rests with them. Although the first deadline is over three years away, many existing leases or those being renewed or granted now, extend beyond 1 April 2018 and perhaps the even more critical date of 1 April 2023, which catches all existing leases.

Leases of affected properties will need to be reviewed. It will need to be established whether the landlord has rights of access to undertake the improvement works and the necessary rights to carry out such works.

Given the wide ranging financial and practical impact of MEES, landlords and tenants should try to formulate a plan of action to comply. Improvement works may disrupt a tenant’s business and inter-party consultation could be mutually beneficial. Further, obtaining a five-year exemption may be in both parties’ interests.

Who is responsible for the MEES' costs?

Some, all or indeed none of the costs for the works could be recoverable under the lease, which is why both landlords and tenants need to be alert about the implications of MEES. The wording of service charge provisions and repairing covenants will therefore be key.

As the first deadline of 1 April 2018 looms ever closer and the market adapts accordingly, leases will need to give landlords the flexibility to deal with MEES.

It must not be forgotten that the energy targets projected by the Government mean that MEES will not end here. The minimum energy efficiency rating will be reviewed by the Government in the future and, more than likely, it will increase. Landlords will once again need to comply with the higher rating, or risk falling foul of the criminal offences contained in MEES.

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