Minimum Energy Efficiency Standards - Important update for Landlords
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 register an exemption it will have to provide supporting evidence. Exemptions 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 upon sale or other transfer and will cease upon such a transfer. The new owner will need to either improve the property to the minimum standard at that point, or register an exemption where one applies, if they continue to let the property.
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, 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 landlords:
- Property portfolios need to be reviewed as a matter of urgency to identify properties with energy efficiency asset ratings of F and G which will be unmarketable beyond 2018.
- Strategies need to be considered for carrying out energy efficiency improvements, otherwise a landlord could be faced with a prolonged void between the old and the new letting whilst improvement works are carried out and this could prove to be extremely costly.
- Put an energy efficiency plan in place where a building has an EPC rating of F or G.
- Understand how the lease terms, break dates, renewals and planned refit periods fit with the timetable of the legislation.
- Consider adding specific EPC related clauses to new leases which allow the landlord to enter the premises to carry out energy efficiency works (this may assist in avoiding penalties but might make it more difficult to claim an exemption).
- Negotiate with the tenant to allocate responsibility for the cost of the works to be shared between the landlord and the tenant.
- Ensure the tenant cannot do anything at the property that would adversely affect the asset rating. Where landlord’s consent is required to alterations, the landlord could arguably reasonably withhold consent if certain alterations would affect the asset rating.
- Consider ‘greening up’ leases and promoting collaboration between landlords and tenants when it comes to improving the energy efficiency of tenanted buildings.
- Consider the legal consequences of not complying e.g., a landlord could be in breach of loan covenants by not obtaining an EPC when required to do so or by not complying with the obligation to increase the energy rating.
- Be aware that changes to the approved calculation software that is used to prepare EPCs may mean that properties initially rated E might get a lower rating when re-inspected.
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.