Most – if not all – commercial property investors will be all too aware of the Energy Efficiency (Private Rented Property) Regulations 2015 or “MEES regulations”, which introduce a “minimum energy efficiency standard” as part of the UK government’s plan to encourage landlords to improve the energy efficiency of their properties.
Overview of the regulations
From 1 April 2023, it will be unlawful for a landlord of a commercial property to continue to let a building with an energy performance certificate rating of F or G, unless they register an exemption.
While failing to comply would not invalidate a lease, landlords could face financial penalties up to £150,000 if they let a sub-standard building.
While the MEES regulations offer opportunities for landlords to increase their capital values by making their properties more energy efficient, these improvements could be costly. Landlords will be considering whether the cost of upgrading non-compliant buildings outweighs the potential loss if their properties cannot be let or they incur a fine. With the minimum standard for energy efficiency increasing, it may be worthwhile landlords making higher-quality improvements that meet a higher EPC rating now, which could ensure future compliance and potentially avoid duplicate costs of upgrading in a few years’ time.
Where landlords experience difficulty in making improvements by 1 April 2023, they may be able to rely on an exemption allowing them to grant, renew and continue to let, despite the property being below the minimum standard.
Exemptions do not apply automatically and landlords must register on the PRS Exemptions Register, giving the property address, landlord name, EPC and supporting evidence. The register is public, and information, including the building address, name of the landlord (if not an individual) and the exemption will be publicly visible.
Exemptions are not a long-term solution; they offer temporary relief and are valid for only five years, unless stated otherwise, after which landlords will need to re-register to continue benefiting.
The exemptions are personal to landlords; if the landlord changes, they will need to re-register in order to continue relying on them.
The exemptions are as follows:
- ‘New landlord’ exemption This applies in limited circumstances where it would be unreasonable to expect new landlords to immediately comply with their obligations under the regulations. For example, where a new lease has been granted via court order and the landlord is thrust into their position unexpectedly. The exemption will be valid for six months from the date of becoming a landlord. As with all the exemptions, landlords must provide supporting evidence when registering it. In this case, landlords should provide an explanation of why they qualify under this exemption.
- ‘All improvements made’ exemption This exemption applies if all cost-effective improvements have been installed but the EPC rating is still below the minimum standard and the property therefore remains sub-standard. If relying on this exemption, landlords will need to register evidence showing that no further improvements will improve the EPC rating, such as a surveyor’s report.
- ‘Cost-effective improvements’ exemption This applies if the cost of making recommended improvements is not cost effective. “Cost effective improvements” means that, after a period of seven years, the money saved because of the improvements will be greater than the amount invested. If registering this exemption, landlords will need three quotes for improvements from qualified installers and confirmation they are not cost effective, including any calculations.
- ‘Consent’ exemption This applies if, despite all reasonable efforts, a landlord cannot obtain the necessary consent to make these improvements, such as from a tenant, superior landlord or local planning authority. If relying on this exemption, landlords will need to upload any correspondence demonstrating their attempts to obtain consent from the relevant parties. When granting new leases, landlords should consider whether rights of access (for the purposes of carrying out works) are included. If not, then the tenant may be able to refuse access and, if it does, this may be grounds for landlords to seek this exemption.
- ‘De-valuation’ exemption This applies if making improvements would de-value the property by more than 5%. Landlords will require an independent surveyor to confirm this in a report.
Do the regulations even apply?
Finally, in addition to the above, landlords will also want to consider whether any particular building falls outside the scope of the regulations.
In broad terms, the MEES regulations do not extend to certain short tenancies, including those with a term of six months or less (with no right to renew), and long tenancies, such as those with a term of 99 years or more. In addition, if a building is not required to have an EPC, then it will fall outside the scope of the regulations.
There are several circumstances where an EPC is not required, as well as a list of exemptions that could apply to a commercial property. The government’s guidance contains a list of the properties that do not need an EPC: www.gov.uk/energy-performance-certificatecommercial-property/exemptions
Many landlords have begun the urgent task of assessing whether the relevant energy efficiency improvements can be made. If such improvements are not sustainable, then thought should be given to whether the MEES regulations apply or whether it is possible to rely on an exemption.
This is a sensible back-up to avoid short-term loss of income and financial penalties. However, the MEES regulations continue to raise the standard of energy efficiency, so upgrading a building’s energy efficiency infrastructure will no doubt be a key focus in any landlord’s long-term planning.
Tim Rayner is a partner and joint national head of real estate disputes and Daniel Moreton is a trainee solicitor at Irwin Mitchell. A version of this article first appeared in EGi.
Commenting on the new Minimum Energy Efficiency Standards (MEES) set to come into force on 1 April, the inner London analysis from BNP Paribas concludes that up to 8% of commercial stock is unlettable under new EPC rules.