On the 1st April 2018, new regulations governing energy efficiency standards, known formally as the Energy Efficiency (Private Rented Sector) (England and Wales) Regulations, will come into force.
The new regulations will require owners of privately rented property to have a minimum energy efficiency rating of an E on the Energy Performance Certificate (EPC).
The Government has recently issued its Clean Growth Strategy, which highlights the Governments renewed focus on reducing emissions in the UK. This is a clear reminder for Landlords, or occupiers intending to assign or sub-let, to consider the energy efficiency rating of their property and ensure it meets the minimum threshold (at the very least) to avoid any penalties.
A brief outline of the scope and exclusions of the new regulations:
- The new regulations, known more commonly as the minimum energy efficiency standards or “MEES”, will affect both commercial and domestic privately rented properties. MEES was initially introduced in March 2015 as a means to improve energy efficiency in rented buildings.
- Subject to certain exceptions (detailed below), on or after 1st April 2018, it will be unlawful for Landlords to grant any new lease or renewal on a commercial or domestic property where the energy efficiency grading is an F or below.
- There is a transitional period for any existing leases; these will not be captured by the new regulations until 1st April 2023, when MEES will apply for all leases.
- In the context of commercial property, MEES applies for tenancies granted for a term between 6 months and 99 years. The regulations will apply to standard full repairing and insuring (FRI) leases but also apply to multi-lets and sublets, therefore this will affect not only Landlords, but also any occupier seeking to assign or sub-let their property.
- Where the Landlord can show that they have made all improvements which are cost effective by showing either that the works will achieve a pay back within seven years, or that the “golden rule” on the Green Deal plan is satisfied; or
- The Landlord is unable to obtain all consents required third parties to carry out improvement works; or
- The improvement works will cause the value of the property to decrease by 5% or more
- According to the new rules, exemptions must be logged on the “Private Rented Sector (PRS) Exemptions Register”. However, this will expire after a period of 5 years and the exemption will not transfer to the new owner if the property is sold.
- The rules apply similarly in the case of domestic property, they exclude property falling within the scope of a “Listed Building” (defined by section 1(5) of the Planning (Listed Buildings and Conservation Areas) Act 1990 as “a building which is included in a list compiled or approved by the Secretary of State”.
- Building without any method of managing their temperature – very basic sheds and also agricultural buildings are outside MEES
- Should a property fail to meet the required standards, Landlords will incur a minimum penalty of £5,000, however this may be much more depending on how long the lease has been non-compliant. For up to 3 months’ noncompliance this will be up to 10% of the property’s rateable value (with minimum and maximum penalties of £5,000 and £50,000 respectively), rising to 20% of its rateable value thereafter (with increased minimum and maximum penalties of £10,000 and £150,000 respectively). However, there is some leeway; from the date of any new tenancy, Landlords will be entitled to a 6 month extension before the property must be compliant.
How does this affect me?
- This is likely to have a large impact on the commercial property market; the Government estimates that up to 18% of non-domestic property has an EPC rating of F or G.
- Landlords should take action now to ensure their properties are compliant, or are registered as an exempt property, to avoid a hefty penalty.
- For tenants or prospective tenants of commercial buildings, you would be well advised to ensure that the Landlord takes action if the property has an energy efficiency rating of F or G. At the very least agreement should be reached with the Landlord to ensure that you are not liable for any works to improve the energy efficiency rating of the property during the term of the lease.
- Anecdotally, the assessment of similar properties shows that each year the threshold for each level of EPC is being bettered and every building will tend to slide down within its class – beware of the pre-let update that unexpected crosses the MEES threshold!
- The release of the Clean Growth Strategy in October 2017 is a clear reminder of the Government’s definite focus on reducing emissions. Though the current regulations impose a minimum energy efficiency rating of at least an E, the Landlords should consider the possibility of this threshold being raised higher; so even EPC ratings of a C or D could be at risk in the future. Furthermore, the Government is also encouraging mortgage lenders to both consider energy efficiency when granting loans, and also promote more energy efficient properties by offering lower interest rates on them, via “green mortgages”. Such measures, if implemented, could make it harder to obtain funding for properties with a lower energy efficiency rating. The Clean Growth Strategy undoubtedly signifies an increasing emphasis on improving energy efficiency standards as monitoring emissions is likely to become more stringent.
If you have any queries in regards to the new regulations for energy efficiency standards, or in relation to commercial properties generally, please do not hesitate to contact our Commercial Property team.