Energy efficiency standards – time to take action
3rd July, 2017
What is happening?
New rules are being introduced based on energy performance certificates (EPC), which measure how energy-efficient a building is.
From 1st April 2018, commercial property landlords will be unable to grant a new tenancy or extend or renew an existing tenancy for a property with an EPC rating below E unless they have carried out all possible cost-effective energy efficiency improvement works (and the property is still rated F or G), or an exemption applies.
This will be extended from 1st April 2023 so that commercial property landlords won’t be able to continue to let a property with an EPC rating below E unless they have carried out all possible cost-effective energy efficiency improvement works (and the property is still rated F or G), or an exemption applies.
What properties do the rules apply to?
The rules – known as the Minimum Energy Efficiency Standards (MEES) Regulations 2015 – apply to properties which are:
- Let under a tenancy
- Not a dwelling
- In England and Wales
The regulations do not apply where the property:
- is not legally required to have an EPC (e.g. industrial sites, holiday lets, certain listed buildings etc);
- has an EPC which is over 10 years old or does not have an EPC;
- is let on a tenancy granted for a term certain not exceeding 6 months (unless the tenancy agreement provides for a renewal extending beyond 6 months or the tenant has been in occupation for a period in excess of 12 months when the tenancy is granted);
- is let on a tenancy granted for a term of 99 years or more
Are there any exemptions?
If a property is rated E or below, it may still be let if any of the following exemptions apply:
1. Third Party Consents
If necessary improvement works require the consent of a third party (which could include a tenant, a superior landlord, a lender or a planning authority) and that consent is refused, or the consent is given but subject to unreasonable conditions, then the landlord will not have to carry out the works and will still be able to let the property.
2. Cost Effectiveness
Improvements only need to be carried out if they are expected to deliver energy bill savings of at least the cost of the improvements (plus interest) within 7 years. The projected energy cost saving is calculated according to a formula in the MEES Regulations 2015.
A landlord can also obtain an exemption where the required improvement works would lead to a reduction of over 5% in a property’s capital or rental value. The landlord would need to obtain a report by an independent surveyor, given that the works might have both positive and negative impacts on value.
Each of the above exemptions will last for five years. After this, the landlord will need to apply for third party consent again or obtain another valuation report.
What are the penalties?
Commercial property landlords who fail to comply with the regulations face fines of between £5,000 and £150,000, depending upon the value of the property and how long they break the rules for.
What should landlords do?
There are a number of steps landlords can take to prepare for the new regime:
1. Review your property portfolio and assess which properties fall within the scope of the MEES Regulations
2. Carry out energy assessments to check whether the EPC ratings for your properties are correct
3. Carry out a review of all leases to understand how the lease terms, renewal dates and planned refit periods fit with the MEES timetable
4. Review all relevant lease terms to understand what rights the respective parties have under the lease to carry out any works and/or the responsibility of the cost of all necessary works
5. Consider whether amendments are necessary to any standard/precedent leases to incorporate any rights required by the landlord to comply with the MEES Regulations and/or pass on any compliance costs to the tenant
How can I find out more?
Government guidance on the issue can be found by clicking here.
For further information on MEES Regulations or on any other aspect of commercial property management, please get in touch.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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