This guide was last updated in March 2017
From 1 April 2018 landlords may not let to new tenants or renew or extend to existing tenants a substandard property. From 1 April 2023 landlords may not continue to let a substandard property to existing tenants.
Government guidance on the Minimum Energy Efficiency Standards for commercial property does not, unfortunately, clarify all the ambiguities in the regulations.
Do MEES apply to all types of building?
MEES only apply to properties that are legally required to have an EPC. If a building is of a type that does not need an EPC then it will not need to comply with MEES. Places of worship, for example, are excluded from the requirement to have an EPC. The guidance emphasises that some listed buildings do need an EPC.
Does this include a Voluntary EPC?
The guidance suggests that if a landlord commissions an EPC for a property which would need one on a sale or letting but where the landlord is not obliged to get one because there is no intention to sell or let the property this will not trigger a MEES obligation. If this is correct it means that a landlord could commission an EPC to establish the property's rating and assess the works which could be done to improve it. However be cautious when commissioning a voluntary EPC as if the property is marketed an EPC will become compulsory. On a purely practical basis, it may be difficult to prove to the enforcement authority that an EPC was obtained voluntarily.
Who is affected?
The primary obligations under MEES fall on landlords; tenants will be affected if they sublet because they will become the landlord; tenants may have to pay for any improvement works under the terms of their lease.
MEES do not apply to owner occupiers.
How will MEES be enforced? What are the penalties?
The local weights and measures authority (LWMAs) will be responsible for enforcement. It is anticipated that LWMAs will enforce through either Trading Standards or Environmental Health Officers. LWMAs have a set of civil sanctions at their disposal, including the ability to serve compliance notices and penalty notices.
Where the LWMA is satisfied that a breach has occurred, a financial penalty of up to £150,000 may be imposed, along with the possibility of being 'named and shamed' through a publication penalty.
The guidance does not clarify if LWMAs will be able to keep the money raised; this could have an impact on the resources available to enforce the regime.
Do MEES apply to all lettings?
MEES do not apply to long leases for 99 years or more, or short leases of less than 6 months where they do not include a right to renew and where the tenant has not already been in occupation for a continuous period of 12 months.
By contrast a periodic tenancy will be caught.
The guidance says it is "unlikely" that an agreement for lease or a licence will be caught by MEES although does not provide examples of when they will or won't. An agreement for lease which includes a right of occupation may give rise to MEES obligations.
Subleases and lease renewals are both lettings so fall within the regulations.
The guidance does not clarify the position on tenancies at will.
Will MEES affect the validity of leases?
Any breach of MEES will not affect the validity or enforceability of any provisions of a lease. Tenants may not terminate their lease on the grounds that their landlord has continued to let an F/G rated property unless the lease explicitly envisages this.
Will EPC banding remain the same over time?
The guidance emphasises that EPC calculations are updated and bandings can change. The next planned change in methodology is in 2023. This may mean that a property's EPC rating goes down where no works have been undertaken.
Does all the work necessary to bring the property up to standard need to be done?
A landlord can claim an exemption from carrying out any improvements recommended by an independent qualified surveyor or in the recommendations report accompanying the EPC which are not cost effective. Cost effective means that the capital cost of the works excluding VAT is less than the energy savings which will accrue over a seven year period. This is assessed on a measure by measure basis.
If a report recommends four improvements, three of which satisfy the test, then the landlord only needs to do those three. This is even if the whole package of measures, including the fourth item, would satisfy the test;
An exemption can also be applied to any works which result in a drop of more than 5% in the property's market value. This must be certified by an independent qualified surveyor.
An exemption can also be applied to the installation of cavity wall insulation, external or internal wall insulation where the landlord has written expert advice saying that the work will have a negative impact on the fabric or structure of the property.
A landlord can claim an exemption where the consent of a third party is needed to do the work and that consent is refused or given subject to conditions with which the landlord can not reasonably comply. Consent includes planning or listed buildings consent, the consent of the tenant or a superior landlord or a mortgagee. The landlord must use reasonable endeavours to obtain the consent.
Often the landlord will need consent from the tenant. Even if the terms of the lease allow the landlord to do the work without getting consent landlords will not want to alienate good tenants by carrying out works which disrupt the tenant’s business. In these cases early dialogue with tenants about the proposed work; the methodology and timing is essential so ensure that tenants do not look to end their leases at the earliest opportunity.
There is a temporary exemption for six months if a landlord buys a property which is already let; or in certain situations where the landlord is "forced" to grant a lease eg when a conditional agreement for lease becomes unconditional. However the regulations do not deal with all of these appropriately and the guidance does not clarify the position.
Although much is being written about the exemptions they are narrowly drafted, time limited and only apply if they are registered so may be of limited practical use.
Registration of exemptions
An exemption must be registered on the PRS register to be valid. The guidance sets out the information which must be sent with the application to register an exemption. The register is open to public inspection although only limited information is available.
Generally exemptions last for five years. After this the landlord will have to reassess the situation. If the exemption is based on a lack of consent from a tenant the exemption will also lapse if that tenant ceases to be the tenant eg the lease terminates or the tenant assigns. The landlord will be expected to try to obtain necessary consent from the new tenant. In multi- let properties this could be problematic and the guidance does not clarify what is expected from the landlord.
The temporary exemptions for new/forced landlords only last for six months. Registration of a temporary six month exemption will need to be part of any post completion actions, along with assessing whether any improvement works are required.
Registering an exemption highlights, on a public register, that you are the landlord of a substandard building which is being let.
Do exemptions pass to new landlords?
A landlord who buys a property cannot rely on the exemption registered by the previous landlord and must register a new exemption based on "up to date" evidence. This could mean commissioning new reports or applying afresh for third party consent.
What should landlords be doing now?
Review the portfolio to establish
- which properties would require an EPC on sale or let and are substandard or "at risk" of becoming substandard;
- what works could be done to improve these properties to an EPC rating of E or above;
- which leases expire after 2018 but before 2023 when it will be an offence to granting a lease of a substandard property. Is there an opportunity to carry out improvement works before a new lease is put in place to avoid a breach? If so, who would be liable for the costs of such works?
- which leases will continue after 2023 when landlords will be prohibited from continuing to let substandard property. Do the lease terms allow for improvement works to be carried out to before then? If so, who would be liable for the costs of such works?
Consider the terms of any new leases, for example do they include:
- a right for the landlord to carry out energy improvement works;
- provision about how the cost of that work is allocated;
- controls over tenant's ability to commission and register EPCs;
- some "light greening" provisions obliging landlord and tenant to consult on the work to be done (see the green lease toolkit published by the building better partnership).
Consider registration of any exemptions that will apply in the PRS Exemptions Register, which is open from April 2017, so that you can continue to grant new leases in 2018.
What should tenants be doing now?
Be aware that subletting a property will mean you become a landlord for the purposes of MEES and that subletting part may require new EPCs to be prepared. Consider the terms of any subleases accordingly.
Review the lease terms especially:
- do they allow the landlord access to carry out the work; can you negotiate with the landlord to minimise disruption?
- can the landlord pass down the cost of any improvement work, for example via a service charge?