On 1 April 2018 the long awaited MEES regulations will come into force, creating an important prohibition on letting substandard private commercial property. “Substandard” will mean property with an energy performance certificate (“EPC”) rating of F or G.
The Regulations will apply to landlords of “private rented property” in England and Wales who currently require an EPC certificate for their premises. Leases for terms of between 6 months and 99 years will be caught, so the regulations will be relevant to almost all commercial leases.
If a property is substandard, the landlord will be obliged to improve the EPC rating to avoid penalties. However, leases granted by the landlord will still be valid.
The regulations will apply to new tenancies (including renewals) created on or after 1 April 2018. They will also apply to pre-existing tenancies from 1 April 2023.
The Secretary of State will establish and maintain a register of exemptions. If a landlord wishes to rely on an exemption, it must register the necessary information. In summary, there are four categories of exemption:
If energy efficiency improvement works are undertaken and there are no further improvements that can be made, the property will be exempt for five years from registration.
Where the tenant has refused to consent to any improvements being made, or where the landlord, despite reasonable efforts, has been unable to obtain third party consent (such as that of a superior landlord) within the past five years, a consent exemption will apply.
The landlord is exempt if, within the past five years, an independent surveyor has confirmed that making the necessary energy improvements will result in a reduction of more than 5% in the market value of the property. This is likely to apply to attractive, older buildings.
Finally, a six month temporary exemption is available in certain circumstances, mainly where a landlord is forced to grant a lease, for example, where the grant of a lease is pursuant to a contractual obligation or where there is a deemed creation of a new lease by operation of law.
Penalties – the ‘teeth’
Suspected failure to comply with the regulations may result in a compliance notice being served by the enforcement authority, requiring specified information to be provided to determine if the landlord is in breach. Such information would need to be provided within a minimum of one month and a landlord’s failure to comply could result in a maximum fine of £5,000 and a publication penalty.
Publication penalties are designed to “name and shame” offending landlords. They will result in publication of the landlord’s name, details of the breach, the address of the property where the breach has occurred and the amount of financial penalty imposed.
A penalty notice may subsequently be issued if the enforcement authority is satisfied that the landlord remains in breach. This may result in a fine, a publication penalty or both.
Where the landlord has remained in breach for less than three months after service of the penalty notice, the penalty will be the greater of £5,000 and 10% of the rateable value of the property (up to a maximum £50,000).
Where the landlord has remained in breach for three months or more, the penalty is the greater of £10,000 and 20% of the rateable value of the property (up to a maximum of £150,000).
Reviews and Appeals
A landlord will have the opportunity to review the penalty and ask the enforcement authority to reconsider. A landlord may also appeal to the Frist-tier Tribunal, who may quash or affirm the penalty notice if appropriate.
Key steps for Landlords
What can a landlord do to ensure compliance with the MEES regulations?
The ideal position for a landlord is to grant a “green lease” with covenants that can be enforced to oblige the tenant to take steps to comply with the regulations.
Alternatively, a landlord may serve a notice to repair if poorly maintained parts of the property are leading to inefficiencies that drive down the EPC rating.
It may also be possible for a landlord to undertake the works and recover the expenditure through service charges, depending on the service charge regime that applies.
Finally, a landlord may ask for access to undertake the works for its own benefit, in order to improve the value of its interest. Tenants in this scenario should agree the scope of any such works from the outset and plan for any impact on future rent reviews.