From 1 April 2023, landlords will no longer be permitted to let commercial properties which have an EPC rating below E without permitted exemptions. Are your commercial properties prepared?
The MEES regulations
The minimum energy efficiency standards, or MEES, were introduced in March 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, which followed the Energy Act 2011.
The current effect of the MEES regulations is that landlords of buildings within their scope must not renew existing tenancies or grant new tenancies of a building if the building has less than the minimum energy performance certificate (or EPC) of rating E (unless the landlord registered an exemption).
However, from 1 April 2023, the MEES requirements for a building to have no less than an EPC rating of E, will extend to all existing commercial leases, even where there is no change in tenancy arrangements (such as a renewal or new lease being granted).
As a result, from 1 April 2023, a landlord may not continue to let a commercial property with an EPC rating below E unless a valid exemption is registered.
MEES compliance is the obligation of landlords, and they will usually bear the cost, subject to any specific terms of the lease.
Tenants who sub-let could also be liable for compliance costs, where those premises do not currently have a rating of E or above.
Exceptions and exemptions
The MEES regulations do not apply to long leases, such as those granted for 99 plus years, and short leases granted for six months or less, save that where a tenant has been in continuous occupation for a period of more than 12 months.
There are some properties to which the MEES regulations do not apply such as temporary buildings with a planned life of two years or less, properties that do not use energy to condition the indoor climate (for example, industrial buildings) and listed buildings where compliance with the regulations would unacceptably alter their character or appearance.
There are also exemptions to the regime. A few key exemptions to note are:
- ‘All improvements made’ – The landlord has made all ‘the relevant energy improvements’ that can be made (or there are none that can be made) and the property remains below the required EPC E standard.
- Seven-year payback – The landlord can demonstrate that the cost of purchasing and installing any improvement or improvements would fail the seven-year payback test, that being where the cost of the works would not pay for themselves in expected savings on energy bills over a seven-year period (from the date the installation of those energy saving measures are completed).
- Consent – Where the landlord can demonstrate that it is unable to improve the EPC rating as it cannot obtain third-party consent to the necessary works. A landlord will need to demonstrate that third-party consent was required, sought and refused, or granted subject to a condition that the landlord could not reasonably comply with.
- Devaluation – An independent RICS registered surveyor has confirmed that the installation of energy efficiency measures would reduce the market value of the property, or building to which it forms part, by more than 5%.
- New landlord – This is a temporary six-month exemption to cover the circumstances where a person becomes a landlord in sudden circumstances. For example, in the case of a guarantor stepping in to take over an existing lease.
Exemptions last for a maximum of five years and need to be registered, with supporting documentary evidence, on the Government’s PRS Exemptions Register. However, landlords need to be careful to keep any registered exemption under review in case circumstances upon which the exemption is based change.
Once an exemption expires, to avoid enforcement action, a landlord will either need to have carried out any necessary works to meet the required MEES standard or seek to register a new exemption.
Penalties and enforcement
Local authorities are responsible for enforcing the MEES regulations through compliance notices and fines.
Where a landlord is renting out a non-compliant commercial property and the MEES breach lasts less than three months, they risk a fine of the greater of £5,000 or 10% of the property’s rateable value, up to a maximum of £50,000.
Breaches of the MEES regulations which go on for longer risk a fine of the higher of £10,000 or 20% of the rateable value of the property, up to a maximum of £150,000.
Local authorities can also fine landlords £5,000 for failing to comply with any compliance notice or if they submit false or misleading information on the PRS Exemptions Register.
The enforcing local authority can also impose ‘publication penalties’ on landlords, which involves them entering details about the breach on the publicly accessible part of the PRS Exemptions Register.
The April 2023 deadline is quickly approaching and so landlords should be reviewing their portfolio to ensure compliance of all existing leases, undertaking works to meet compliance or registering an exemption.
For more information
If you have any questions on the upcoming deadline and the potential implications, please contact Rhys Baker in the property litigation team.