The Minimum Energy Efficiency Standards (or “MEES”) are now law

The Minimum Energy Efficiency Standards were introduced in 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations to improve the energy efficiency of UK buildings and thus achieve carbon reduction targets set by the EU.

These targets were brought into legislation by EU leaders in 2009 and include both a 20% reduction in greenhouse gas emissions (from 1990 levels) and a 20% improvement in energy efficiency by 2020. On 1 April 2018, the MEES regulations came into force. Landlords of privately rented domestic and non-domestic property in England and Wales must ensure that their properties reach at least an Energy Performance Certificate (EPC) rating of E before granting a tenancy to new or existing tenants.

Key dates to be aware of

• March 2015 – MEES Regulations introduced through the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.
• April 2016 – Tenants’ right to request energy efficiency improvements in the domestic sector.
• April 2017 – PRS Exemptions Register becomes available for commercial landlords and October 2017 for residential landlords.
• April 2018 – It will be unlawful to grant new leases (or renew tenant leases) of residential or commercial property with an EPC rating of less than “E” unless registered as an exemption.
• April 2020 – Regulation extended to apply to ALL residential lettings (both new AND existing).
• April 2023 – MEES will apply to ALL existing commercial leases. All PRS properties will need to meet the minimum standard or be registered as an exemption.

Exemptions

MEES regulations do not apply to all properties, the following properties are exempt from the Regulations:

• Properties not required to have an EPC under the Energy Performance of Buildings Regulations 2012.
• Properties with a short lease (less than 6 months) or with a long lease (greater than 99 years).

There are also exemptions for sub-standard properties in the following
situations:

• All cost-effective improvements work that have a simple payback period of seven years or less have been undertaken. These works include replacing inefficient mechanical and electrical services, fabric improvements and the provision of renewable technologies.
• A landlord is unable to obtain third party consent, for example from the planning authority, lender, superior landlords, sitting tenant etc.
• An independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% (such as providing thermal insulation to the internal face of external walls).
• If a sub-standard property is sold, the new owner/landlord has only 6 months to comply with the regulations; an important due diligence consideration for prospective purchasers and occupiers. Exemptions last for 5 years and to qualify for an exemption a landlord must register the property on the Private Rented Sector (PRS) Exemptions Register and state the reasons.

Penalties

Depending on the severity of infringement, landlords of non-domestic buildings could be fined between £5,000 and £150,000 for breaching the Regulations. However, whilst the financial penalties can be quite severe, we believe that compliance will largely be self-regulated. Landlords will not want to see their property breach the minimum standards given the impact it will have on the value of their asset. Any attempt to circumvent the regulations will in the first instance be enforced by the landlord’s professional advisors. Solicitors must not act on transactions that breach the regulations and other professional advisors such as Surveyors and Property Managers will want to ensure that they have correctly advised their clients for fear of negligence claims if the landlord is prevented from letting the property.

Who pays – landlord, or tenant?

Where there is an existing lease in place of a low rated property a landlord will inevitably want to improve the energy rating so that it does not fall foul of the Regulation on renewal or on the grant of a new lease. Landlords will want to pass on any costs associated with carrying out the works required to improve the rating onto their tenants. Our belief is that the landlord has little ammunition in respect of existing leases unless it has been expressly agreed. The landlord is also unlikely to be able to recover any costs through the repairing covenant or via the service charge. Works required to increase a property’s energy efficiency rating is an improvement to the property not a repair. If the landlord wants the tenants to contribute towards the costs of the works it must be expressly stated, either in the service charge or the repairing covenant. The area where landlords can and should exert some control over its tenant is on the issue of alterations. Tenant’s fit out works, and alterations should be carefully monitored and advice taken from an Energy Assessor before consent for such works is granted. The cost of instructing an Energy Assessor to advise on a tenant’s proposed works should be recoverable under the terms of most leases and, in our opinion, in many circumstances it will be reasonable for the landlord to refuse its consent to works that reduce the energy rating. Whilst a tenant may well point to the reinstatement clause in the lease, many tenants do not last the full term of the lease and it is therefore reasonable for a landlord to be concerned about the possible implications that tenant’s works could have to the energy rating of a property.

Who benefits from MEES?

Recommendations to improve EPC ratings help to reduce energy consumption and its associated costs. The energy savings not only benefit the tenant and its use of the property but also the landlord’s asset value. Green buildings have been shown to save money through reduced energy and water use and lower long-term operations and maintenance costs. Energy savings in green buildings typically exceed any design and construction cost premiums within a reasonable payback period.

Warning with inaccurate EPCs

When EPCs were first introduced they were largely seen by many in the property market as nothing more than burdensome regulations that needed to be complied with as opposed to something that could drive energy improvement. One of the main criticism of an EPC is that it assumes a property remains constant throughout the 10-year validity period of the certificate. The reality is that properties can change significantly, especially when new leases are granted to new tenants who inevitably want to carry out fit out works. As a result, we have found that a
large volume of EPC ratings are not accurate. The face value of an EPC may project a certain rating and banding but behind this facade can lie a nasty surprise to Landlords and future purchasers. This can especially be seen in the case of older EPCs. Alterations to the property and changes in the rating software and increased standards have often downgraded EPC ratings by 2 bands. The only way to ensure complete accuracy and gain a true reflection of the EPC rating is to undertake a further assessment. We would expect that Energy Assessors will now form part of the team of advisors alongside solicitors and surveyors for commercial property investors. This will effectively allow the Landlord to make considered plans.

Rent Review and Asset Value

Rent review is an area where we foresee potential problems and benefits for both landlords and tenants. It is important that both landlords and tenants know the true EPC rating of the property when entering the rent review process and do not merely rely on the current EPC. Having a highly rated EPC also has social benefits, attracting and maintaining quality tenants, who are concerned about the environment and/or their energy bills. Following recommendations and improving a building’s energy performance rating can also bring up the asset value of the property. It is a belief among analysts that energy efficiency offers an enormous “win-win” opportunity. Through aggressive energy conservation policies and regulations, organisations can both save money and reduce negative externalities associated with energy use.

Final thoughts

The purpose of the Regulations is to ensure that non-performing properties are brought up to a minimum standard. However, the unintended consequence could be that even landlords of compliant properties seek to achieve a “gold standard” rating given the benefits it may produce. Only time will tell whether the MEES Regulations are the catalyst for improved energy efficiency in the property market.

For more information, contact Core Sustainability

T: 0207 183 4885
E: [email protected]
www.coresustainability.com

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