Minimum Energy Efficiency: it’s all about MEE MEE MEE


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For further information, please contact Helen Curtis-Goulding, Partner, Fladgate LLP (hcurtis-goulding@fladgate.com)


 

As stated in our articles ‘A greener and more pleasant land?‘ andEPCs and minimum energy efficiency standards for private rented properties, the implementation of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (Regulations) takes effect from 1 April 2018.

With the implementation date fast approaching, this article is intended as a reminder of the main requirements imposed by the Regulations and a review of the practical consequences for those letting and occupying commercial premises.

Requirements imposed by the Regulations

The Regulations will impose a requirement on landlords of residential and non-residential property to ensure that their property meets the Minimum Energy Efficiency Standards (MEES), subject to certain exceptions.

Unless the property has an Energy Performance Certificate (EPC) rating of band “E” or above, the landlord will be unable:

  1. from and including 1 April 2018: to grant a new tenancy or renew an existing tenancy of a residential or non-residential property;
  2. from and including 1 April 2020: to continue to let a residential property; or
  3. from and including 1 April 2023: to continue to let a non-residential property.

Further information on the main implications of the Regulations and the exemptions referred to below can be found in our article ‘EPCs and minimum energy efficiency standards for private rented properties.

Exemptions

The Regulations will also provide a number of exemptions from the MEES requirements that may be available to landlords, most notably:

  1. seven year payback test – where the landlord can show that the improvements would not be cost-effective within a seven year payback period;
  2. third party consent – where a third party’s consent is required to carry out the energy efficiency improvements but cannot be obtained by the landlord following reasonable endeavours; and
  3. devaluation – where the landlord can show that the improvements would reduce the value of the property by 5% or more.

Where a landlord intends to rely on an exemption, they must register their entitlement to do so on the Private Rented Sector Exemption Register (PRS Register) by supplying details of the exemption and accompanying evidence of eligibility prior to 1 April 2018.

Practical implications for landlords

In light of the upcoming implementation of the Regulations, current and future landlords will need to start considering the potential impact of MEES upon their ability to market, deal with and maintain the value of their properties, including in the following circumstances.

Existing portfolios

Landlords who own existing portfolios of one or more properties that are either let or intended to be let will need to review the extent and cost of any improvement works that may be required to bring their properties up to MEES standard.

They may also need to review the potential exemptions available and, if an exemption is to be relied upon, prepare sufficient evidence to support their entitlement to do so and arrange for it to be registered on the PRS Register.

Portfolio owners who currently let or intend to let their property should therefore take advice on the energy efficiency profile of their existing portfolios and, where a sub-standard property or properties are identified, begin making preparations to upgrade them or arrange for evidence of their exemption to be registered.

Renewal leases

The Regulations will apply to renewal leases from 1 April 2018 and landlords will therefore need to ensure that valid EPCs are made available to existing tenants at the time that any renewal is completed after this date.

Landlords should be aware that there may be practical obstacles to obtaining access to the property and carrying out works to improve its energy efficiency, where the tenant is in occupation and trading.

Landlords should also consider the potential recovery of the cost of the works, either through service charge or following commercial agreement with the tenant, if it can be shown that the tenant will benefit from the consequential improvement in the property’s energy performance.  Many tenants are likely to resist this, however.

Landlords should therefore take advice on the remaining term of their existing occupational leases and begin making preparations for any that are due for renewal.

Acquisition of investment property

Any party who is considering the acquisition of an investment property will need to be aware of the effect of the Regulations and the obligations that they will be subject to once the property has been acquired.

Any exemptions that the current owner relies upon will not automatically transfer with the property on completion so any purchasers or transferees (including intra-group transferees) will need to re-register the exemption or take steps to ensure that the property complies with the Regulations.

Prudent investors should therefore take advice on the potential cost and practical implications of the Regulations and ensure that the price they pay takes into account any upgrading works that may be required.  Lenders are also expected to police this area more rigorously, because of the consequences if a defective property is unlettable.

Practical implications for tenants

Although the Regulations are expected to have a greater impact on landlords, existing tenants or those who are considering entering into a tenancy would also be well advised to consider their potential implications, including in the following circumstances.

Access and recovery of cost

For tenants already in occupation or anticipating the renewal of their existing lease, consideration should be given to the landlord’s ability to access the property and to carry out any works required.

They should also consider the landlord’s potential ability to recover the cost of any upgrading works, depending upon the precise wording of the lease, and the potential impact that their installations and plant may be having on the property’s energy efficiency profile.

Tenants should therefore seek advice on the terms of their lease and ensure that they are aware of their own and the landlord’s rights of access and recovery of cost in anticipation of the Regulations coming into effect.

Alterations

Under the terms of their lease, tenants will often be prohibited from carrying out any alterations to their occupied property that may adversely affect the property’s energy efficiency rating or take it below an “E”.

As a result, any tenants that are intending to undertake alterations will need to consider the impact of the Regulations, particularly where the property only just satisfies the minimum standard required.

Tenants would be well advised to take advice on the energy efficiency profile of their occupied property and consider whether any planned alterations may fall foul of the Regulations.

Subletting

Any tenants who are planning to sublet the whole or part of their occupied property will need to consider the impact of the Regulations and the possibility that works to upgrade the property may be required before they can do so.

In the event that they are required, further consideration will need to be given to whether the tenant has the right to carry out such works under the terms of the lease and who will be responsible for the cost: the tenant or the subtenant.

Tenants who are considering subletting should therefore seek advice on the energy efficiency profile of their occupied property and consider whether the Regulations impact upon their ability to sublet.

Conclusions

If they have not already done so, landlords and tenants should seek urgent advice on the extent to which they will be affected by MEES, the availability and application of any exemptions, and the practical, financial and reputational risks that could arise from a failure to prepare for or comply with the Regulations.

Fladgate would be happy to offer such advice should it be required.

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