Major changes to how the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the “MEES Regulations”) affect commercial property are coming into effect on 1 April 2023.
On 1 April 2018, it became unlawful to grant a new commercial lease of a ‘sub-standard’ property with an EPC rating of less than E without a permitted exemption.
From 1 April 2023, it will also become unlawful to continue to let any commercial property with an EPC rating of F or G, (i.e. where the lease was granted prior to 1 April 2018), without a permitted exemption. This will affect up to 8% of inner London commercial stock according to BNP Paribas Real Estate analysis of government data.
As a commercial landlord, you need to take action immediately to stay compliant with the MEES Regulations.
Do the MEES Regulations apply to my property?
The MEES Regulations only apply to properties required to have an EPC rating. There are certain properties, such as listed buildings (where compliance with minimum energy performance requirements would unacceptably alter their character or appearance), which may not require an EPC. However, the provisions as to whether an EPC is required or not are complex, and we suggest obtaining legal advice to avoid falling foul of the MEES Regulations.
Short leases of less than six months (with no right of renewal) and long leases of over 99 years are excluded from the MEES Regulations so there is no need to provide an EPC to the tenant.
What are the key changes to the law from 1 April 2023?
Landlords cannot continue to rent a property with an EPC rating of F or G. Despite it being unlawful, the lease is still valid and enforceable and the landlord and tenant must continue to comply with their respective covenants in the lease, including payment of rent, service charge and other sums due.
Where the MEES Regulations apply, landlords must hold a valid EPC at all times to demonstrate that a property has the requisite EPC rating of E or higher. Previously, where an EPC expired during the term of the lease, there was no obligation to obtain a new one.
Tenants that are leasing sub-standard property must continue to pay all rents, service charge and other payments, and it will not be possible to terminate the lease on grounds of non-compliance with the MEES Regulations. Likewise, the landlord cannot require the tenant to vacate the property.
What are the penalties for non-compliance?
Where a commercial landlord continues to rent a sub-standard property a penalty notice could be served with fines issued up to £150,000. The size of fine will depend on the rateable value of the property and the length of the breach of MEES.
What are my options?
Review your property portfolio in line with the government guidance for landlords. For any properties with EPC ratings of less than E, consider whether you can apply for an exemption. A temporary six-month exemption may apply where a person suddenly becomes landlord of a property with an EPC rating of below E. Additionally, the following key exemptions apply to commercial property and last for five years:
- Seven-year payback: where a landlord can show that the cost of implementing a recommended improvement is greater than the expected energy bills savings over seven years.
- All improvements made: where all the recommended energy efficiency improvements have been made to the property but the EPC remains below E.
- Consent: where implementing a recommendation requires the landlord to first get consent from a third party, such as the local authority or superior landlord.
- Devaluation exemption: where an independent chartered surveyor advises that the installation of specific energy efficiency measures would reduce the market value of the property by more than 5%.
Note any of the above exemptions must be registered on the PRS Exemptions Register by the landlord and will only be valid from the point of registration. Exemptions cannot be transferred to a new owner or landlord.
If an exemption doesn’t apply, you will need to carry out energy improvement works to attain an EPC rating of at least E. Your EPC report will list recommendations for improving the energy efficiency of your property. When carrying out improvements, you will need to liaise with tenants, and comply with any consent requirements and service charge recovery provisions in the lease.
Why you should take action…
The focus on minimum energy efficiency standards is here to stay. A government consultation in 2021 proposed a minimum EPC rating of C or above by 2027, and B or above by 2030.
If you would like to discuss the MEES Regulations and how the new minimum EPC rating affects your property, please get in touch.