Does Your Property Make The Grade?

From 1st April commercial landlords in England and Wales will have to make sure their properties meet new regulations, or face sanctions.

The Energy Efficiency (Private Rented Property) (England and Wales) MEES Regulations 2015 (“MEES”) are intended to prevent landlords letting sub-standard commercial property.

From 1st April, properties with a Band F or G rating will be deemed sub-standard, and will need to be upgraded to at least Band E before being let.

The regulations affect new and renewal leases, commencing on or after 1st April 2018. Existing leases with terms extending beyond 1st April 2023, will require an energy rating of at least E in order for the letting to continue after that date. It is worth noting that a landlord cannot use failure to achieve MEES as a way to circumvent the security of tenure provisions under Landlord and Tenant Act 1954.Similarly, a tenant will not be able to use non-compliance with MEES as a means of terminating a lease.

Certain industrial sites, workshops, non-residential agricultural buildings with a low energy demand, some listed buildings and holiday lets are excluded from MEES. Also subject to exception are tenancies of less than six months with no right of renewal and tenancies of over 99 years.

Some exempt properties are expected to require registration on the central government Private Rented Sector (PRS) Exemptions list. This is currently subject to a pilot scheme, but the proposed exemptions include:

Consent exemptions – where in the last five years the landlord has been prevented from carrying out improvements because of a tenant’s or third party’s refusal to assist in providing key information.

The Golden Rule - where an independent assessor determines that all relevant energy efficiency improvements have been made to the property or that improvements would not pay for themselves through energy savings within seven years.

Devaluation exemptions -  where in the last five years a landlord has not increased the EPC rating because a surveyor has advised that making such improvements would cut more than five percent of the property’s market value. 

Enforcement

It is expected that local authorities will be able to serve compliance notices and impose civil penalties for non-compliance. Once a compliance notice is served, a landlord would have to show whether a property is let, and if it is let, whether or not it requires an EPC.

From 1st April 2018 an enforcement authority can serve a penalty notice on a landlord where it is satisfied that the landlord is, or has been, at any time in the preceding 18 months letting a sub-standard property in breach of a compliance notice.

Financial penalties for letting sub-standard commercial property are onerous, with landlords being liable for fines of up to £10,000 or a percentage of the rateable value.

Things to consider

The immediate effects of these regulations on landlords will, of course, be the financial cost of upgrading non-compliant buildings and the potential loss of income if premises cannot be let. 

The format of the existing lease may also pose problems. The current lease may not permit the landlord entry to carry out the efficiency improvements or there may be restrictions in a headlease to consider. It is also possible that current lease provisions may not allow the landlord to recover the cost of the improvements from the tenant. 

Landlord’s may of course try to recoup costs of complying with MEES  by inflating rent or increasing service charges. Whether this is possible in practice will come down to the commercial bargaining power of those involved, and the terms of the lease. Whilst some larger landlords and pension funds have begun incorporating additional provisions into their leases to deal with MEES, this may not always be possible or appropriate, especially for the secondary property market. Provisions dealing with MEES need to be looked at on individual basis to ensure (as far as is possible) that rent is not suppressed on review and that marketability is unaffected.

This is a complex topic. It is wise for landlords to carry out energy assessments now, review their leases and take professional legal advice.