We are now less than a year away from the introduction of the Minimum Energy Efficiency Standards (MEES), which are due to come into force on 1 April 2018 and will make it unlawful to grant a new lease of residential or commercial premises with an EPC rating of band F or G. As this will affect both commercial and residential properties, now is the time for landlords to review their property portfolio and consider whether any improvements need to be made to their properties.
Changes that are coming into effect from 1 April 2018
Landlords, traditionally, might ‘shy away’ from carrying out energy improving works as they consider it a cost that only the tenant will benefit from. The introduction of the MEES change this. From April 2018, it will be unlawful to grant a new lease of residential or commercial premises with an EPC rating of band F or G except for tenancies of less than six months or over 99 years. It will also apply to all existing residential and commercial lettings, meaning landlords must not continue to let a property with an EPC rating of band F or G.
Whilst failing to comply with the regulations will be unlawful, it will not invalidate the lease or result in the landlord having to evict the tenant. If a landlord fails to comply, they will be subject to a civil fine, which could be substantial. A breach for less than three months could mean a fine of up to £50,000 (minimum – £5,000) and for a breach of three months or more, it could be up to £150,000 (minimum – £10,000) for commercial properties.
The fines for residential properties are lower. A breach for less than three months could result in a fine of up to £2,000 and a breach of three months or more could result in a fine of up to £4,000.
These are not insignificant sums for either a commercial or residential landlord. However, there are a number of exemptions from which a landlord can benefit.
Exemptions for landlords
First there is consent exemption. This is where the tenant of the property refuses to consent to any relevant energy efficiency improvement being made, despite reasonable endeavours by the landlord, or consent is granted but subject to a condition with which the landlord cannot comply. Another is devaluation exemption, which can apply where improvements would result in a reduction of more than 5% in the market value of the property. There is also the option of temporary exemption, where a six month exemption is applicable in the case that a landlord purchases a property subject to an existing lease or in other leasing scenarios. Finally, a landlord could benefit from seven-year payback, if the savings made from the recommended improvement works are less than the capital cost of their implementation over a seven year period.
Exemptions must be registered on the central government PRS Exemptions Register before 1 April 2018. However, it should be noted that the exemptions are only valid for five years and cannot be transferred to a new landlord. It is very important to register any exemption as soon as possible.
Landlord and tenant considerations
Going forward this is an area that landlords and tenants (and their lawyers) will have to carefully consider.
On purchasing or selling freehold properties, whether vacant or occupied, landlords and their lawyers should carefully consider the MEES in view of the property’s EPC rating. If it falls below band E, sellers may see a reduction in the value of their property, unless they carry out the works. Purchasers, on the other hand, may look to reduce a purchase price depending on the level of works required.
Landlords should also review and assess their portfolios and consider current lease terms, break dates and renewal dates to check whether required works fit into the MEES timings.
In addition, tenants who are occupying or anticipate occupying a property should also consider the EPC rating as this may impact on their ability to sub-let, and carefully check any dilapidations claims going forward to ensure they do not pay for any necessary improvements on behalf of the landlord.
Finally, both parties should consider who is to fund any works. The lease terms should be carefully considered, when negotiating, as the landlord may try to make the cost of the works recoverable from the tenant through a sum reserved as rent or the service charge.
Given the fines, landlords should very carefully review their portfolios, prepare EPCs, consider any exemptions and, if need be, carry out the necessary works. Landlords can delay but, inevitably, any improvement works are likely to have to be undertaken unless an exemption is logged.