From 1st April 2018, if your commercial property is not MEES compliant, you could be prohibited from letting it or renewing the lease, causing significant financial issues moving forward.
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, better known as the Minimum Energy Efficiency Standards (MEES) Regulations prohibit a landlord from letting a sub-standard property from April 1st 2018 and from continuing to let a sub-standard property from 1st April 2023. A sub-standard property is one that fails to meet the minimum energy efficiency standard set at an Energy Performance Certificate (EPC) rating of an E. Therefore, a property with an F or a G rated EPC, unless exempt or excluded, is likely to be at risk from the MEES Regulations.
Lease Dates and EPC Ratings
The most important issues to determine right now in your portfolios are:
• When properties will be re-let or lease renewals from and after 1st April 2018.
• Whether you have valid EPC certificates for the relevant properties and whether they are an F or a G rating.
It is worth looking at a selection of scenarios to clarify MEES compliance and requirements.
Scenario 1: Landlord to let property on a new lease from April 2018
If the property already has an EPC which is less than 10 years old, this can be used to let the property.
If the EPC is more than 10 years old or there is no EPC for the property, a landlord must obtain a new EPC before they can market and let the property.
If in either case the EPC is rated an F or G then the landlord will have to carry out sufficient energy efficiency works to improve the property to a minimum of E (or register a valid exemption if applicable) before issuing a tenancy agreement.
Scenario 2: Property currently let on a 10-year lease with F rated EPC
The EPC was legally required in 2015 and as EPCs are valid for 10 years will run to 2025.
On the 1st April 2023, as the landlord is continuing to let the property and there is a valid EPC in place with an F rating, the landlord will need to comply with the minimum energy efficiency provisions.
Scenario 3: Property let on 20-year lease with F rated EPC
An EPC was obtained in 2012 and therefore expires in 2022.
On the 1st April 2023, the landlord continues to let the property, but is not captured by the MEES regulations as the EPC has expired. At this point there is no legal requirement to obtain another EPC, as continuing to let.
The landlord will only need to comply if they re-let the property to a new tenant or the current tenant, once the current lease expires, or if they or the tenant modifies the property in a manner that would require a new EPC.
If the tenant decides to sub-let part of their property, a new EPC would be required. If this EPC is an F or a G rating, the landlord will need to comply with MEES as the property now has a valid, legally required EPC.
Important Points to Note
- An EPC is valid for 10 years, but there is no requirement to renew it, unless a trigger event such as a new letting or sale occurs.
- If a property is an F or G and the landlord has undertaken all energy efficiency works required to comply, but the property remains an F or a G rated EPC, it can be let, but the landlord will need to register the property on the government PRS Exemptions Register and review the situation in 5 years.
- If an owner registers a property on the Exemptions Register and transfers or sells that property to another owner, if that second owner continues to let the property, they must produce their own exemption. The exemption is not transferrable.
In order to ensure MEES compliance, landlords need to plan ahead to reduce any void letting periods or exposure to financial penalties.
Any owner will want to ensure that when they let a property, that it complies with the regulation at the end of the lease and that any work that the tenant undertakes does not impact the EPC rating detrimentally. Equally, the tenant will not want the owner to use the regulations as a strategy to get them to pay for improvements that would upgrade the rating of the EPC when the serviceable life of the building systems is still valid.
It would be advisable for the building owner if possible to take control of the EPC process so that they can ensure compliance and accuracy of the EPC rating.
Practical Steps to Achieve MEES Compliance
- Portfolio Review: identify properties with no EPC, review lease renewal dates and decide whether a new EPC is required, noting that as soon as a valid, legally required EPC is undertaken, the property will fall under the MEES regulations.
- Confirm that ‘at risk’ properties, i.e. F and G EPCs are really F and G by undertaking new EPCs to provide accurate and dependable ratings before undertaking any retrofit works.
- Identify means of retrofitting ‘at risk’ properties to achieve an E rating or better and assess the cost of compliance. Review impacts of future refurbishments and planned preventative maintenance (PPM) schedules.
- Incorporate energy efficiency improvements into retrofit and PPM schedules.
- Update leases, tenant fit-out and dilapidations processes to allow for appropriate provisions for the landlord/owner to continue to comply with the requirements of MEES