Landlords in the commercial private rented sector will see their responsibility for the energy efficiency of their properties increase significantly from 1st April 2018. This follows the introduction of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.
At present, a landlord is generally required to provide an Energy Performance Certificate (EPC) upon the proposed letting of a property, subject to certain exceptions. An EPC designates an energy efficiency rating for a property ranging from A (at the most efficient) to G, which can give tenants an idea of how well insulated a property is and how efficient its heating, cooling and ventilation systems are.
Under the minimum energy efficiency standard (MEES) set by the Regulations, it will be unlawful for a landlord to grant a new lease (including an underlease and a lease renewal) of an applicable property with an EPC rating lower than band E from 1st April 2018.
Landlords will eventually be prohibited from continuing to let any commercial property within the scope of the Regulations, including where an existing lease is in place, from 1st April 2023.
Improvements will need to be carried out to sub-standard properties to ensure compliance with the MEES otherwise landlords risk being the subject of enforcement action if an exemption is not available.
Exceptions and Exemptions
Properties that do not require EPCs, such as places of worship and temporary structures, will not be caught by the new regime.
Tenancies with a term of 6 months or less (providing there is no right to renewal or extension and the tenant’s actual occupation does not exceed 12 months) and tenancies with a term of 99 years or more will also fall outside of the scope of the Regulations.
For properties that would otherwise need to comply with the MEES, landlords can apply for exemptions in the following circumstances:
- Where all cost-effective improvement measures within a seven year payback period have been implemented
- The required consent of any third party, such as superior landlords, tenants or lenders, cannot be obtained and the landlord has made reasonable efforts to do so
- The proposed necessary improvements to comply with the MEES would devalue the property by at least 5% of its market value
Exemptions will last for 5 years and must be registered on the Private Rented Sector Exemptions Register.
A landlord must either comply with the MEES or demonstrate that an exemption still applies on expiry of the 5 year period. As such, it is perhaps more appropriate to think of the ‘exemptions’ as merely deferrals.
Enforcement and Penalties
Non-compliance with the MEES may result in enforcement action being taken by a local authority.
A compliance notice could initially be served on a landlord where the local authority suspects there to be a breach of the Regulations. The landlord must then provide evidence relating to the alleged breach.
If such evidence fails to satisfy the local authority that the breach has since been sufficiently addressed or if evidence is simply not forthcoming, the next step will be to issue a financial penalty and to publish details of the breach.
The financial penalty will depend on the severity of the breach and length of time it has subsisted during a letting, and could be as much as £150,000 if the breach has subsisted for three months or more.
The Regulations have not been warmly received by the property industry and are ultimately a product of a European Directive. There is therefore a small degree of uncertainty as to whether the MEES will actually come into effect in light of the UK’s vote to leave the European Union.
However, as it stands, we are on course for the changes to take effect from 1st April 2018 and, given that the Regulations are entrenched in UK law under the Energy Act 2011, there is unlikely to be a reversal of policy at this stage. In short, sitting tight and hoping that this will all go away is not a gamble worth taking.
It is estimated that around 16-18% of all commercial property in England and Wales would currently be in breach of the MEES.
Landlords should have already started considering what action to take – whether by making the necessary improvements, preparing to apply for an exemption, or looking to dispose of properties where neither option is feasible.
EPCs are valid for 10 years, and those properties with a relatively aged EPC rating of band E may also give landlords cause for concern. Whilst these properties would currently comply with the Regulations, changes to the way EPC ratings are calculated could mean that a new EPC may result in a lower rating.
As the energy efficiency of commercial building stock improves over time, the minimum standard could rise.
It goes without saying that the marketing of lower-rated properties, and the potential to secure finance against them, will inevitably become more problematic.
Whether you are a prospective landlord or a tenant, the effect of the MEES could have significant repercussions on your rights and obligations under a lease.
The Regulations could obviously affect provisions that relate specifically to EPCs, such as when an EPC can be commissioned and by which party. But it won’t stop there.
Negotiations on service charges, entry and inspection rights, statutory compliance obligations, covenants on alterations, conditions on returning a property to the landlord and – perhaps felt most acutely – rent review provisions, are all likely to be impacted. Careful consideration must be given to these issues to protect your position as far as possible and ensure that you are aware of your responsibilities.
If you are looking to enter into a lease of commercial premises, it is vital that you obtain expert advice to safeguard your interests and guide you through the process.
Contact the Property Department at Abrahams Dresden to find out how we can help you.
Matthew Stephenson, Solicitor, Abrahams Dresden LLP
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.