Turning The Heat Up On Minimum Energy Efficiency Standards For Commercial Property
From April 2018 , a new legal standard for minimum energy efficiency will apply to rented commercial buildings which have their own Energy Performance Certificate (‘EPC’).The Minimum Energy Efficiency Standard (‘MEES’) was introduced in March 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the ‘Regulations’). The MEES Regulations originate from the Energy Act 2011.
The Minimum Standard
At the moment, commercial buildings have an energy efficiency rating that scales from A-G; with F and G being the worst performing. The changes in April 2018 will introduce a minimum standard. For commercial properties this will be a minimum of an E rating. The Regulations refer to this in their guidance as the prohibition on the “letting sub-standard property”. Ignoring the Regulations may result in heavy monetary fines against the landlord.
With effect from 1 April 2018, landlords of buildings within the scope of the Regulations must not renew existing tenancies or grant new tenancies if the building has less than the minimum EPC rating of E; unless the landlord can obtain and register an exemption. EPC’s last for a period of 10 years. At the expiry of the ten year period there is no need for landlords to obtain a new EPC unless they wish to, or, until such time as a triggering event such as the property being sold, let or modified (i.e. alternations made by tenants).
The burden increases for landlords on 1 April 2023, where landlords must not continue to let any buildings which have an EPC rating of less than E (unless the landlord has a registered exemption).
What commercial premises does MEES Apply?
All non-domestic property types are within the scope of the regulations, except for those that do not require an EPC under current regulations, which include , for example, listed buildings. MEES will also not apply to lettings of 6 months or less, or to lettings of 99 years or more. However, in certain situations the regulations apply to sub-lettings and assignments where an EPC already exists, this may affect the proposed new landlord, the superior landlord and the incoming tenant. Advice should be sought if there is any doubt as to the responsibilities under the terms of any lease.
The following are examples of when an exemption to meet the MEES may be given in respect of the premises:-
1. All cost-effective energy efficiency improvements, either within a seven year payback or under the Green Deal’s “Golden Rule”, have been carried out. 2. Consent to undertake the necessary works is refused by a third party such as a Local Authority or an incumbent tenant. 3. A qualified expert provides written advice that the improvements to the premises result in a devaluation of the property by 5% or more, or in the alternative that the works would damage the premises.
Any exemption that is given in respect of the regulations will last for five years and will need to be lodged on a centralised register (due to go live in April 2018). Should a property be sold, it will not necessarily mean the exemption will pass with the property and the new owner should make enquiries as to whether they will need to apply for a further exemption or make the necessary changes to make the property compliant with the Regulations.
Penalties for non-compliance
The regulations will be enforced by Local Weights and Measures Authorities (the ‘Authorities’).The Authorities can check a property to ensure it meets the necessary level of energy efficiency, and may issue a compliance notice requesting information where it appears to them that the property has been let in breach of the Regulations. If it is found by the Authorities that the property was let in breach of the Regulations, the Authorities can serve a penalty notice on the landlord by way of financial penalty. Penalties will be based on the rateable value of the premises, up to a maximum of £150,000.00 per occasion.
Considerations for Landlords
MEES will have a significant impact on Landlords. In some circumstances, MEES will:-
1. Make it illegal to let premises unless they are upgraded to meet the minimum standards. 2. Effect the valuations of any properties within landlords portfolios. 3. Adverse effects on rent reviews and renewals for premises that fall below the minimum requirements. 4. Potentially cause difficulties in respect of dilapidation claims which may also exist upon the tenant exits the premises.
Therefore, landlords should take steps to consider the premises in their portfolios in order to ascertain what work, if any, needs to be undertaken. Energy efficiency improvements should , where possible, take advantage of void periods, lease breaks and/or be included as part of any on-going maintenance and renewal programmes.
We recommend that both landlords and tenants take advice on the Regulations if they are in any doubt to ensure that practical steps are taken to resolve any potentially costly dispute. Please contact either Alex Jeffery or David Scarrott who will be able to advise you on the best course of action given your circumstance.