In eight months’ time, private sector landlords of commercial properties will be prohibited from granting new leases on buildings with energy performance certificate (EPC) ratings of F and G. A substantial proportion of D and E rated properties are also at risk of becoming unlettable upon being reassessed.
So what can landlords do to prepare for the Minimum Energy Efficiency Standards (MEES) and what are the key points surrounding the new regulations?
1. What are the MEES Regulations?
The “MEES Regulations” are enacted in UK law under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.
From 1 April 2018 landlords of non-domestic private rented property are prohibited from granting a new lease of any “sub-standard” properties (i.e. those that have an EPC rating below E). Further, from 1 April 2023, these requirements will also apply to existing lettings.
There are a number of exclusions and exemptions that will enable a landlord to let, or continue to let, a sub-standard property. These include leases of less than six months or more than 99 years, and properties where an EPC is not required. Whatever the reason, if a landlord wishes to register an exemption they must do so by 1 April 2018 otherwise those in breach could be subject to a publication and/or financial penalty.
2. Why are 65 per cent of properties at risk?
Collectively around 65 per cent of properties in England and Wales are at risk. That’s because 18 per cent are F and G-registered and the 47 per cent that are D and E-rated should not be considered “safe” as they are at risk of being downgraded to F or G ratings. With EPCs first being undertaken in 2008 and having a ten year validity, many will require reassessment next year under far more stringent testing criteria and tougher Building Regulations standards, which is likely to lead to significant downgrading.
3. MEES – a tenant’s advantage?
In the majority of cases, there is nothing stopping a tenant from having a new EPC carried out and registered, which will supersede a landlord’s existing EPC. This could cause a fundamental shift in the relative bargaining position of landlord and tenant where, for instance, an existing D-rated property is downgraded to a non-compliant F or G rating and the tenant is alive to the use of this in, for instance, lease renewals, rent review and dilapidations scenarios.
4.What should landlords be doing now?
The MEES Regulations could significantly alter the landlord and tenant balance throughout the lifecycle of a lease; from impact on headline rents, to rent reviews, re-gears, lease breaks and dilapidations – the savvy tenant of an ‘at risk’ property could put their landlord in a very uncompromising position and landlords need to be on the front foot to defend against this.
The risk potential of a given property can only be judged individually taking into account the following: the validity of the existing EPC, the risk profile of the property failing the MEES Regulations, the ability to recoup upgrade costs from the tenant, and the applicable exemptions, if any.
While there could be a temptation to commission wholesale renewal of all EPCs across portfolios, this will result in the needless downgrading of a property in circumstances where it could have been lawfully let for the foreseeable future.
There also needs to be a clear focus on lease drafting. The ability of landlords and tenants to protect themselves through careful drafting will be important to regulate the impact of the MEES Regulations on the relationship and avoid any contentious situations.