Minimum Energy Efficiency Standards - Important update for tenants
Guidance has recently been issued by The Department for Business, Energy & Industrial Strategy relating to the minimum level of energy efficiency required to enable a landlord to let commercial property which will have a major impact on landlords, tenants and lenders.
Under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations):
- from 1 April 2018, landlords of commercial properties must not renew existing tenancies or grant new tenancies if the property has an EPC rating of band F or G unless the landlord registers an exemption.
- from 1 April 2023, landlords must no longer let or continue to let commercial property which has an EPC rating of band F or G unless the landlord registers an exemption.
Essentially, where a building falls short of the Minimum Energy Efficiency Standards (MEES), the landlord must carry out works to improve the building’s energy efficiency performance or pay a civil fine.
The fines could prove to be quite substantial - up to £50,000 per property for a breach of up to 3 months and up to £150,000 per property for a breach of 3 months and over. There will also be reputational sanctions in the form of “naming and shaming” of non-compliant landlords.
Local authorities will enforce the Regulations.
- The landlord has undertaken improvements that are cost-effective but the building remains below an E EPC rating. (Cost effective broadly means that an improvement pays for itself within seven years).
- The landlord is required by a contractual or legislative obligation to obtain a third party’s consent or permission to undertake relevant improvements relating to the minimum standard and such consent was denied, or was provided with unreasonable conditions. A third party would include a tenant, lender, superior landlord/freeholder or planning authority etc. The landlord will need to demonstrate it used reasonable endeavours to obtain that consent.
- Measures required to improve the property are expected to cause a capital devaluation of the property of more than 5%.
- The installation of wall insulation would have a negative impact on the fabric or structure of the property (or the building of which it is part).
The exemptions register will be open from 1 April 2017. If a landlord wishes to register an exemption it will have to provide supporting evidence. An exemption will last for 5 years, at which time the exemption will be reviewed.
Property specific information relating to exemptions will be publicly accessible which may cause reputational issues for landlords of “sub-standard” properties. Exemptions cannot be transferred to new landlords or owners of a property on sale or other transfer and will cease on such a transfer. If the new owner continues to let the property it will need to either improve the property to the minimum standard at that point, or register an exemption where one applies.
Buildings excluded from the scope of the requirements:
- Buildings and monuments officially protected as part of a designated environment or because of their special architectural or historical merit where compliance with certain energy efficiency requirements would unacceptably alter their character or appearance. Listed buildings may not be exempt.
- A building used as a place of worship and for religious activities.
- A temporary building with a planned time of use of 2 years or less.
- Stand-alone buildings with a total useful floor area of less than 50 square metres.
- Buildings which are not required to have an EPC such as industrial sites, workshops and non-residential agricultural buildings with a low energy demand.
- Buildings let on tenancies of less than 6 months (with no right of renewal).
- Buildings let on tenancies of over 99 years.
- Buildings for which an EPC has been obtained voluntarily where one is not needed. Official registration of any such EPC will not in itself require the landlord to comply with the minimum standard.
Action for tenants:
- Ensure that standard clauses in a lease do not oblige the tenant to carry out work to improve the energy efficiency of the property or to have to pay for it through the service charge.
- Include a clause in the lease stating that the tenant is not to be responsible for any energy efficiency improvements.
- Consider limiting repairing obligations by reference to a schedule of condition.
- Consider requesting wider rights to make alterations or improvements to bring the property up to minimum standards to enable a swift subletting and to make the property more appealing to prospective assignees (this may increase the price offered or speed up the process). Although the MEES don’t apply to assignments so an F or G property can be assigned without EPC works being carried out, fewer assignees may be interested in properties with poor energy performance.
- Seek to avoid the landlord reserving wide ranging rights of access to carry out improvement works.
- Consider how any proposed works are to be managed in order to avoid disruption.
- Plan ahead to implement strategies to accommodate any improvement works that may need to be carried out.
- Look at the existing EPC to ascertain if the property will be affected.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.