Have you got MEES on your mind?

Landlords of commercial premises should put 1 April 2023 into their diaries and review their commercial property portfolios before that date.

Why?

Changes to Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, commonly referred to as the MEES (Minimum Energy Efficiency Standards) Regulations, mean that landlords should not continue to let substandard properties after this date. These changes raise a lot of questions.

What is a substandard property?

A property with an energy performance certificate (EPC) rating of F or G will be substandard. However, the government is keeping that under review and proposes raising the standard so that only properties with an EPC rating of A or B will not be substandard by 2030.

What kind of property does this apply to?

The property must:

• be in England or Wales;
• be let under a tenancy;
• not be a dwelling; and
• be required to have an EPC.

What kind of lettings does this apply to?

The Regulations will apply to most lettings, but the guidance suggests that they will not apply to properties occupied under licences (although care should be taken that the occupation is genuinely under licence and is not a lease). There is some debate regarding the Regulations’ applicability to Tenancies at Will. The MEES Regulations are unlikely to apply to agreements for lease. Short tenancies will be exempt, but this only refers to tenancies of 6 months or less where there is no provision for extending that term or renewing it. The exemption will not apply where the occupier has been in occupation for a continuous period of more than 12 months. Very long tenancies of 99 years or more will also be exempt. The current Guidance conflicts with the requirements for an EPC to be obtained in respect of a renewal tenancy.

What does the landlord have to do?

The MEES Regulations do not oblige a landlord to carry out energy efficiency improvements but expose the landlord to the risk of enforcement action if it continues to let a sub-standard property in breach of the Regulations.

Can a property with an EPC rating of F or G continue to be let after 1 April 2023?

In certain circumstances, yes, namely if:

1. All relevant energy efficiency improvements have been made, but the property is still substandard
2. No relevant energy efficiency improvements can be made, and an exemption applies.
3. The landlord, within the last five years, has not been able to improve the EPC rating of the property because they have been unable to get consent to carry out relevant energy efficiency improvements.
4. Within the last five years, the landlord has obtained a report confirming that carrying out relevant energy efficiency improvements would devalue the property by at least 5%.
5. In limited circumstances, a temporary six-month exemption can be obtained.

All exemptions must be registered on the PRS Exemptions Register.

Must the landlord get an EPC?

If the property does not have an EPC at the point when compliance with the MEES Regulations is being assessed, then the MEES Regulations will not apply. Landlords should, however, be aware that anybody can commission an EPC, and just because they have not commissioned an EPC does not mean that no EPC for the property exists. Landlords should also bear in mind that improving standards under the EPC regulations means that properties with an E rating will not necessarily still have that E rating if a new EPC is commissioned.

What should be done if the property is substandard?

Consideration should be given to whether:

• Relevant energy efficiency improvements should be made, which would result in the property no longer being substandard, or
• All relevant energy efficiency improvements have been made, or
• No relevant energy efficiency improvements can be made

And in the case of the last two, landlords will need to apply for an exemption if the property remains at an F or G rating.

What is a relevant energy efficiency improvement?

In simple terms, it is either:

• An improvement which qualifies for Green Deal Funding (although, for practical purposes, this is not relevant to commercial properties)
• An improvement where the expected energy savings over a seven-year period will be at least the calculated repayment cost, which is the capital cost of the improvement, installation costs, and interest. An EPC assessor should be used to carry out these calculations, and three separate quotes for works will be required. It is worth noting that these calculations should be undertaken for each individual improvement, and one calculation for a “package” of works should not be done.

What if a landlord is in breach of the MEES Regulations?

Leases granted or continuing in breach of the MEES Regulations are valid and continue to be enforceable. Enforcement of the MEES Regulations is undertaken by the Local Weights and Measures Authority. In the event of a breach, the penalties may be:

• Financial – this could be up to the greater of £10,000 or up to 20% of the rateable value of the property, up to a maximum of £150,000
• Publication – details can be entered onto the public part of the PRS Exemptions Register

What should landlords be doing?

Landlords should check their leases to see whether they have any properties where continued letting is likely to be a problem after 1 April 2023 and the EPC position in respect of them.  The EPC position should be kept under review in case an EPC is obtained by somebody other than the landlord themselves.  If the property is or is likely to be substandard, then consideration should be given to what energy efficiency improvements can be made or whether any exemptions apply.

Further information

For further information or advice, please contact Sarah Barratt, Associate Solicitor, on (0191) 211 7923 or email [email protected].