With less than three months to go until the government’s next deadline in its energy efficiency agenda, landlords need to take action now to either comply or register a valid exemption.
The MEES Regulations require a minimum energy efficiency standard (MEES) to be met before properties in England and Wales can be let and, from 1 April 2023, continue to be let.
This article is concerned with the impact of MEES on leases of commercial property other than:
- leases of 6 months or less (provided that the tenant has not already been in occupation for 12 months or more, or there is provision for extending the term); and
- leases of 99 years or more.
F&G-Day Deadline – 1 April 2023
At present, landlords cannot grant new leases 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 registered a valid exemption.
From 1 April 2023, the MEES Regulations will apply to all existing leases, meaning that it will be unlawful for landlords to continue to let a property with an EPC rating of F or G without a valid exemption.
MEEStakes and emptions
The key exemptions available to commercial landlords are:
- No EPC required: when a property is not required by law to have an EPC, the MEES Regulations do not apply.
Listed buildings – there is a common misconception that listed buildings are automatically exempt from the requirement to obtain an EPC. Rather, they are exempt ‘insofar as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance’. This will need to be looked at on a case by case basis and should not be considered a blanket exemption.
Renewal leases – there is a conflict in the government guidance for the EPC and MEES regimes. Under the EPC guidance, EPCs are only required on a ‘sale or let’ and it specifically excludes lease renewals from the definition of ‘sale or let.’ This conflicts with the MEES guidance which suggests an EPC is required on a renewal. Despite requests for clarification, the government has not amended either but the market seems to have moved towards the more conservative approach with EPCs being requested and provided on any renewal.
- Consent: where the landlord has been unable to obtain any necessary third party consent (for instance from a tenant, a superior landlord or a lender) to carry out the proposed works, or where a third party has granted consent subject to a condition which the landlord cannot reasonably comply with.
The landlord may require access to the tenant’s demised premises in order to carry out any relevant energy efficiency improvement works and, unless the lease reserves a right of access for the landlord to carry out such works, the tenant will need to grant the landlord access. This may prove difficult as some tenants may refuse on the basis that it would disrupt their business, or may be willing to grant access but in exchange for a concession, such as a rent-free period or alternative premises for the duration of the works.
Therefore, it might be better not to reserve the necessary rights for the landlord so that the landlord is more reliant on the tenant providing its consent. However, the landlord will need to show that it has made ‘reasonable efforts’ to obtain consent, and provide evidence of this when registering the exemption. There is no definition of ‘reasonable efforts’ but more than just a token effort will be required.
A landlord will not meet the reasonable efforts threshold if it indirectly seeks to undermine its application for consent by:
- emphasising that the tenant will bear the costs of any works as they are to be recouped via the service charge regime;
- not challenging a refusal of consent, particularly where, under the lease provisions, the tenant must act reasonably when considering applications for consent;
- exaggerating the nature and duration of the works; and/or
- offering some inducement for refusal of consent.
- Devaluation: where the landlord has received a report from an independent surveyor stating that the relevant improvements would result in a reduction of more than 5% of the market value of the property. For example. If the works would reduce the lettable space within the property, the market value could be affected.
- Temporary exemptions:
- New landlord: on purchasing a sub-standard property which is currently let to tenants, the new landlord has a six month ‘grace period’ from the date of purchase to improve the property’s energy efficiency; and
- Seven year payback: where the landlord can show that the expected value of savings on energy bills over seven years is less than the cost of the necessary energy improvement works.
- All relevant energy efficiency improvements made: where all the relevant energy efficiency improvements for the property have been made, or there are no relevant energy efficiency improvements that can be made, and the EPC rating of the property remains below an E.
One point regularly overlooked is to claim an exemption, the landlord must register itself on the Private Rented Sector Exemptions (PRS) Register to avoid the possibility of enforcement action. Any exemption doesn’t come cheap. Exemptions involve administrative and other costs to demonstrate that the exemption applies.
No exemption lasts more than five years, so landlords will need to either register a new exemption before the original one expires, or carry out the relevant energy efficiency improvements in the meantime. The availability of a substitute exemption is also not guaranteed.
Consequences of non-compliance
Importantly, where a property is let (or continues to be let) in breach of MEES, the lease remains valid and in force but the landlord will be exposed to penalties. The enforcement authority can impose both financial penalties (up to £150,000) and publish transgressions which may have PR implications. As penalties can be levied in respect of each unlawful tenancy, financial penalties could add up quickly, for instance in a multi-let building.
Next steps – action to take before 1 April 2023
- Review portfolios to identify properties with an EPC rating of F or G, and/or properties without an EPC. Consider whether a new assessment is required.
- Seek advice on whether a property falls within any of the exemptions and if so, register any exemption to avoid enforcement action.
- Obtain fee proposals for the cost of improving a property to bring it to the required target EPC rating – this will help to make an informed decision and potentially help claim (and prove) an exemption. Consider taking expert advice on what cost-effective improvements could be made to improve the rating to meet the requirements for 1 April 2023, as against more substantial works to meet the requirements that are forecast to follow in 2027 and 2030, which may deliver a longer-term benefit.
- Check the terms of the lease to see if the landlord is allowed to carry out works to improve the EPC rating, and whether any tenant or third party consent is needed. Where consent is required, apply for consent; consider opening a dialogue now with tenants or third parties, and keep a full record of any communication with them.
- Check the terms of the lease to establish whether any costs can properly be classed as service charge items.
- If no exemptions can be registered or renewed, plan and implement the relevant improvements before 1 April 2023, liaising with tenants as appropriate.
- Consider how the property can be future-proofed. The direction of travel is clear – MEES obligations are anticipated to step up again, with government proposals for requirements of a minimum EPC rating of C in 2027 and B in 2030. Landlords may therefore wish to implement any energy improvement works with this in mind, looking to ways to improve the energy efficiency of their properties in the longer-term.
- From 1 April 2023, the MEES Regulations will make it unlawful for landlords to continue to let a property with an EPC rating of F or G without a valid exemption.
- Exemptions must be registered on the Private Rented Sector Exemptions Register.
- There are no blanket exemptions. Most will require action on the part of the landlord together with evidence of such actions.
- No exemption lasts more than five years.