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Published 23 June 2022
During the chaos of the last 2 years, it is likely (and understandable) that energy efficiency matters took a back seat for landlords who were grappling with a host of Covid related legislation and the general uncertainty in the industry. However, we are fast approaching the government’s next deadline in its ambitious energy efficiency agenda and landlords should be considering now what needs to be done to ensure they do not fall foul of the rules around energy efficiency.
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations) which came into force in England and Wales on 1 April 2018, apply to private rented residential and non-domestic property and are aimed at encouraging landlords and property owners to improve the energy efficiency of their properties, as required under the Energy Act 2011. MEES stands for “minimum energy efficiency standard.”
This note is concerned with non-domestic properties which are covered by Part 3 of the MEES Regulations.
At present, under the MEES Regulations, landlords cannot grant a tenancy to either new or existing tenants of properties that have an Energy Performance Certificate (EPC) with a rating of F or G unless they have a legitimate reason.
Position from 1 April 2023
From 1 April 2023, it will be an offence for a landlord to continue to let a property with an EPC rating below E without a legitimate reason.
In essence legitimate reasons for continuing to let a property with an EPC rating of below E include:
In each case a landlord must enter the relevant details on the Private Rented Sector (PRS) Exemptions Register to avoid enforcement action.
The rules around the exemptions are fairly complicated but include:
If there is no valid exemption registered for a property, then there is a risk of fines of up to £150,000 in addition to other penalties so failure to comply could be costly.
The local weights and measures authority is tasked with enforcing the MEES Regulations in respect of non-domestic properties. In practice, the enforcement authority is likely to appoint the local Trading Standards Officers (TSOs), who also enforce the EPC regime, to enforce the MEES Regulations, in relation to properties in its area, on behalf of those authorities.
Under proposals within the Government’s UK Energy White Paper, Powering our net zero future, published 14 December 2020 all non - domestic properties will need to benefit from at least a C rating before they can be let from April 2027, and from 1 April 2030, it proposes that the requirement will be for all properties to have at least a B rating.
Compliance will have a significant impact on landlords and investors, particularly those with large portfolios.
Whilst this timetable may appear generous, early planning is essential and many landlords will be concerned as to the financial and administrative burden placed on them by the new rules. The Government’s consultation paper estimates that setting the Band C Target would require a £1.5 billion private investment and landlords will need to consider now how they will fund the relevant energy efficiency improvements required to achieve the proposed targets.
There are currently some inconsistencies between the EPC and MEES regimes, for example, the question as to whether an EPC is required on a lease renewal. Currently, a property only falls within the scope of the MEES Regulations if there is a valid EPC in place. This means that where there is no requirement for an EPC then MEES Regulations will not apply. Where a lease is being renewed and there is no valid EPC in place for that property, if the renewal does not trigger the requirement for an EPC, the MEES Regulations will not apply to that renewal. However a landlord will also need to consider whether a new EPC is required on a lease renewal. Under the EPC Non Domestic Guidance, EPCs are only required on a “sale or let” and the guidance specifically excludes lease renewals from the definition of “sale or let.” This conflicts with the Non-Domestic MEES Guidance however which suggests an EPC is required on a renewal. It is still unclear which is correct although many landlords have taken the approach that the express exclusion in the EPC Guidance justifies no EPC being commissioned, particularly where their property is likely to be sub-standard.
Under the Government’s new proposals, it will be a requirement for all landlords to hold an EPC at all times, save in respect of some limited situations, thereby removing the potential conflict and ensuring renewal leases are caught by the MEES Regulations.
The Government also intends to place obligations on letting agents and online property letting platforms to only advertise and let properties that comply with the MEES Regulations in order to engender compliance.
What should landlords be doing now?
The Government is not showing any signs that their policy in this area will change and the new rules will affect the vast majority of properties. Action is therefore needed by landlords sooner rather than later to minimise any risk of enforcement action for breach of the MEES Regulations.
Is it better not to reserve rights for the landlord to carry out the works so that you are more reliant on the tenant providing its consent?
The landlord will need to show it has used “reasonable efforts” to obtain a consent. There is no definition of what “reasonable efforts” may be but to register the exemption the landlord will have to provide details of all of the efforts it has made to obtain the consent and copies of its correspondence with the relevant parties and ensure it can demonstrate sufficient “reasonable efforts” had been made.
It would also need to retain copies of all correspondence in the event of enforcement action.
Landlords will need to tread carefully. It is unlikely that a landlord will have used reasonable efforts where it applies to a third party for consent but indirectly seeks to undermine its application by:
The MEES Regulations state that the landlord can rely on the exemption if it has failed to obtain the consent in the “preceding 5 years” however there is ambiguity as to when this 5 year period runs from. The Guidance seems to suggest that the 5 years runs forward from the date of the registration of the exemption but it is not clear. In any event the landlord can only rely on the exemption for 5 years and after that needs to register a new exemption and presumably go through the process above again.
The exemption will terminate on the earliest of the disposal by the landlord, end of the tenancy, the date the third party no longer has the right to give or withhold consent, the date the property is improved to non-sub-standard condition, and the expiry of the 5 year period referred to above.
It is worth noting that the Regulations allow for works to be separated so that if consent cannot be obtained for certain works there may still be viable improvements works which could be carried out (where the relevant consent can be obtained or is not required). The landlord cannot claim the exemption for these viable improvements works.
Where would a landlord stand if there were no rights reserved but tenant said it was happy for the landlord to do the works but at its own cost?
The landlord would, under the MEES Regulations be expected to carry out and fund the relevant energy efficiency improvement works, subject to any further exemptions being available and depending on whether the service charge provisions of the lease would enable the landlord to recoup all/some of the cost.
“Relevant energy efficiency improvements” are those which are cost effective. This is fairly complicated to evidence and test but broadly, where the expected value of savings on energy bills that the relevant energy efficiency improvement is expected to achieve over a period of seven years (starting with the date the installation is completed) is the same as, or greater than, the calculated repayment cost the landlord has a legitimate reason under the MEES Regulations not to carry it out. It must register this fact on the PRS Exemptions Register, and must supply 3 separate quotes from “qualified installers” to evidence the capital and installation costs, together with the resulting calculations. Concerns have been raised that the requirement to obtain 3 separate quotes may lead to suppliers charging for quotes and therefore within its recent proposals, the Government is considering whether to replace this 3 quotes requirement with a more user friendly payback calculator.
What about the scenario where the tenant’s aged fit out was causing the low rating, does this mean the landlord will be required to pay for an upgrade to tenant lighting or M&E to boost the EPC rating?
This will depend on whether the requirement for an EPC has been triggered or if there is already a valid EPC for the property. Where there is a valid EPC, if the rating means the property (which will include the tenant’s M&E etc) is sub-standard then, from April 2023 it will be an offence for the landlord to continue to let the property without carrying out relevant energy efficiency improvement works in this scenario. We would need to check the lease for any ways the tenant could be obliged to carry out any such works and/or pay for them itself and if there are any exemptions which could be relied upon by the landlord.
There have been some concerns that in this scenario a tenant may seek to take advantage of the MEES Regulations and commission its own EPC. If the EPC rating is below the current required rating then the landlord could be obliged to carry out relevant energy improvements works at its cost (depending on the provisions of the lease) and it may be to the landlord’s benefit to release the tenant from its reinstatement/yielding up obligations at the end of the lease which would result in the removal of these compliant improvements works. This is why most leases now contain a prohibition on tenants obtaining or commissioning an EPC.
Does reference to the property mean the property let by the landlord or the property as let by the landlord PLUS the tenant fit out?
The MEES Regulations do not make a distinction and the EPC rating could be adversely affected by the tenant’s fit out works which consequently affect the landlord’s obligations under the MEES Regulations. The Government’s proposals acknowledge that, in future, there may be ways in which tenants can share some responsibility in respect of the MEES Regulations and is considering whether the MEES Regulations should include imposing obligations on tenants in this regard.
The new Government proposals also contain a suggestion that where the property is a shell there should be a 6 month grace period for the commissioning of an EPC which would allow for a fit out period and thereby avoid the need for the landlord to procure an EPC at shell and core stage and for an EPC with an improved rating to be obtained following completion of the tenant’s works.
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