Minimum energy efficiency standards (MEES): Private rented sector

21st January 2016

Introduction

In order to achieve the UK’s legislative carbon-reduction targets, greenhouse gas emissions from buildings must be almost zero by 2050. Whilst standards are already in place to deal with the energy efficiency of new buildings, bearing in mind that over half of the buildings standing today will still be standing in 2050, improving energy efficiency standards for existing buildings will be key to achieving carbon-reduction goals. The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations) will go some way to achieving those targets as, from 2018, they will prohibit landlords form letting commercial properties with an EPC rating of less than E.

Background

Approximately 18% of commercial properties (and 10% of domestic properties) are in the lowest two Energy Performance Certificate (EPC) bands (bands F and G). As a result, the government included provisions in the Energy Act 2011 [1] to guarantee that the energy efficiency standards of buildings achieved a requisite level and to oblige the Secretary of State to put in place regulations to support these measures. As a result the Regulations were made, Parts 1 and 2 of which come into force in April this year, with Part 3 coming into force in October and as a result Minimum Energy Efficiency Standards (MEES) will apply to private rented property in England and Wales.

The Regulations

By virtue of the Regulations by April 2018 all eligible commercial property will need to obtain an EPC rating of no less than E before it can be let. Initially the Regulations will prohibit a landlord granting a new tenancy or renewing an existing tenancy; however as of 1 April 2023 the Regulations will apply to all lettings, including those subject to existing leases.

The requirement for a EPC rating of E will not, however, apply to leases granted for a term of six months or less (providing that the granting of the tenancy does not mean the tenant will have occupied the property for more than 12 months) or any property let on a tenancy of more than 99 years. Furthermore those properties that are not required to have an EPC are outside the scope of the Regulations.

The Regulations include safeguards designed to ensure that only appropriate and cost-effective improvements are required. Landlords may be eligible for an exemption from the requirement to reach the minimum EPC standard if they can evidence that one of the following applies:

• the measures are not cost effective, either within a seven year payback or under the Green Deal’s Golden Rule [2]
• despite reasonable efforts the landlord cannot obtain necessary consents to install the energy efficiency improvements (including consents required from tenants, lenders and superior landlords)
• a suitably qualified expert provides written advice that the measures will reduce the value of the property in question by more than 5%.

If an exemption applies, a landlord will be able to let a property even if its EPC rating is lower than E, but the exemption must be registered.

Preparing for the changes

Landlords would be well advised to start reviewing their portfolios now in order that any work required to comply with the legislation can be undertaken in good time (and in any event by the deadlines of 1 April 2018 for new leases and lease renewals and 1 April 2023 for all lettings).

Landlords may also want to consider whether they wish to make any changes to their standard form leases to take into account the Regulations. Provisions which may be affected include the following:

• Alterations – landlord’s may wish to consider whether they require the ability to prevent a tenant undertaking works that may adversely affect the energy efficiency of a premises or result in a lower EPC rating. In circumstances where landlords are able to reasonably withhold consent to alterations such changes are unlikely to be required as the concept of reasonableness is sufficiently wide to enable consent to be withheld if proposed alterations would have a detrimental effect on energy efficiency, etc.
• Costs – a landlord is likely to want to recover from its tenant any money it expends undertaking works to comply with MEES. Where the costs incurred are, in legal terms, repair (as opposed to improvements) then a landlord will generally be able to recover costs through the service charge provided that the heads of recovery are drawn sufficiently widely.
• Yield up – whilst landlords might consider amending their leases to include an obligation on the tenant to yield up with either an EPC rating equal to the rating at the date of the lease (or potentially no lower than the MEES rating from time to time) tenants are likely to resist this if it would require them to improve the premises as opposed to merely maintaining it in accordance with their repairing obligations.

As such, whilst some amendments to leases may be worth considering, landlords should ensure that any changes made do not have unintended implications for tenants.

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[1] Sections 42 – 51
[2] The Green Deal is the government’s flagship initiative to improve the energy efficiency of buildings by eliminating the up-front cost of certain energy-efficiency measures. It is based on the key principle that energy efficiency measures should be self-funding through the resultant savings on energy bills (known as the ‘Golden Rule’).