The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 or MEES which will be introduced on 1st April 2018 will mean that a commercial property cannot be let unless it obtains an Energy Performance Certificate at a minimum rating of E. The regulations will come into force for new lets and renewals of tenancies with effect from 1st April 2018 and for all existing tenancies on 1st April 2020.
If a property fails to meet the minimum standard, measures will have to be put in place identifying energy efficiency improvements. A property cannot be let until these measures have been implemented.
Not only will a property not able to be let, there is likely to be a knock on effect on rental value. It is possible that the greater the cost of the improvement measures required, the lower the rental values a commercial property will be able to attract. This is obviously particularly disadvantageous to landlords.
In addition, following statutory lease renewals landlords may not be able to re-let their properties if they do not hold the requisite Energy Performance Certificate.
Rent Reviews could also be affected to the disadvantage of landlords. On rent review those properties without the minimum standard EPC could lose their entitlement to a higher rent.
Which Properties Are Not Affected?
1. Buildings which are not required to have an EPC;
industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holiday lets.
2. Buildings where EPC is over 10 years old or where no EPC;
If a building has an EPC that is more than ten years old i.e. a sale or lease has not triggered the need for a new one, there is no automatic requirement to have another one produced. This does not fall within the scope of the regulations. A further EPC will only be required when a sale or letting takes place.
If a building does not have an EPC i.e. it has expired, there is no automatic requirement to have another one produced. This does not fall within the scope of the regulations. A further EPC will only be required when a sale or letting takes place.
3. Tenancies of less than six months with no right of renewal
4. Tenancies of over 99 years
What Are the Exemptions?
Landlords can let a building below the minimum standards if the following apply:
The Golden Rule - where an independent assessor determines that all relevant energy efficiency improvements have been made to the property or that improvements would not pay for themselves through energy savings within seven years.
Devaluation - where an independent surveyor determines that the relevant energy efficiency improvements that could be made to the property are likely to reduce the market value by more than 5%.
Third Party Consent - where consent from persons such as a tenant, a superior landlord or planning authorities has been refused or given with conditions with which the landlord cannot reasonably comply.
Exemptions must be registered on the central government Private Rented Sector (PRS) Exemptions register.
What Are the Penalties for Non-Compliance?
The penalty for renting out a property for less than three months in breach of the MEES regulations will be 10% of the property’s rateable value subject to a minimum penalty of £5,000 and a maximum penalty of £50,000. After three months the penalty rises to 20% with a minimum penalty of £10,000 and a maximum of £150,000.
Therefore, the moral of the story is to ensure that your property complies with the minimum standard before 1st April 2018.
What Should Landlords Do Now?
The immediate effects of these regulations on landlords is likely to be the financial cost for upgrading non-compliant buildings and the potential loss of income if a building cannot be let out.
More in-depth effects relate to the format of the existing lease. The current lease may not permit the landlord entry to install the energy efficiency improvements or there may be restrictions in a headlease to consider. Additionally, lease provisions may not allow the landlord to recover capital expenditure required for improvements from the tenant.
Landlords Can Prepare Now by Doing the Following:
(a) auditing portfolios to understand which properties are within the scope of the MEES Regulations and whether exemptions apply.
(b) carrying out energy assessments to check that EPC ratings are correct.
(c) reviewing their leases to understand their rights.
What Can Howells Solicitors do for You?
Our trained commercial conveyancing solicitors can help you to understand the impact of MEES on your property portfolio and what actions you should take.
We highly recommend that you speak to us to see if you are exempt from MEES. If so, then you need to notify the Government operated PRS Exemptions Register. This opens on 1st October 2017. We can help you with this registration.
Call our team today on 0808 178 2773 to learn more.
