From 1 April 2018, if you are a landlord of privately rented commercial or residential property, you will be unable to grant a new lease of that property to a tenant unless it has a minimum E rating on the property’s energy performance certificate.
And from 1 April 2020 (residential property) and 1 April 2023 (commercial property), you will be unable to continue to let that property unless it has a minimum E rating.
Commercial tenants under existing leases who wish to sublet their premises and landlords renewing leases will also be caught by the regulations from 1 April 2018, and there will inevitably be a debate between the landlord and the tenant as to who is going to pay for any energy efficiency improvement works.
A landlord cannot automatically assume that it will be able to pass the cost on to the tenant through the service charge. Who bears the cost will depend on the terms of the lease, and older leases are unlikely to have provided for the MEES regulations.
Residential tenants will have the right to request energy efficiency improvements regardless of whether the property has an EPC rating (and the tenant is responsible for paying for any energy efficiency improvements carried out so no upfront costs fall on the landlord unless they have agreed to contribute).
Exemptions
■ Third-party consents exemption: Landlord needs to demonstrate that it has not been able to obtain third-party consent, for example, from a tenant, or a superior landlord, or by a refusal of planning permission for the carrying out of the recommended works
■ Cost-effectiveness exemption: Landlord needs to demonstrate that even if the works were carried out, they wouldn’t pay for themselves over seven years, based on energy bill savings
■ Devaluation exemption: Landlord must demonstrate the improvement works would actually reduce the market value of the property by more than 5%
■ The exemptions must be pre-registered on the PRS Exemptions Register maintained by the secretary of state and will last for five years
■ After five years, a landlord must then either comply with the regulations or demonstrate a new exemption. Importantly, an exemption registered by one landlord is not transferable, so any new purchaser of the property will need to register its own exemption
The MEES regulations make a landlord’s unreasonable refusal of consent to a tenant’s requests to make prescribed energy efficiency improvements to a property unlawful. However, they can refuse permission for improvements to be made in certain circumstances and can also make a counter-proposal, but the tenant must consent to those works before they can be carried out.
EPCs were first required for residential property in 2007 and in 2008 for commercial properties. As EPCs are valid for 10 years, these older EPCs will be coming up for renewal.
Landlords must beware that a property that was rated D or E in the early days may not achieve a minimum E rating this time around. In fact, EPCs have been shown to drop by up to 2 ratings when a new EPC is created due to the enhancement of energy efficiency requirements in buildings and the improvement in EPC assessments since 2008.
Therefore, if your EPC has a minimum E rating and does not expire before the 1 April 2018 deadline, don’t rush to renew the certificate without doing your homework on what the likely new EPC rating will be.
The EPC will list the key recommended actions that can be taken to save money and improve the energy efficiency of the property. These may include increasing the existing loft insulation, installing cavity wall insulation, draught proofing, and installation of new lighting and heating/cooling equipment.
The EPC will also set out the indicative costs for the improvement measures, as well as listing the typical savings per year, and give a prediction of the rating after the suggested improvements have been made.
Failure to comply
Failure to comply with the MEES could put landlords at risk of financial penalties of up to £150,000 in commercial property cases and £4,000 in residential properties.
Penalties
■ If a landlord rents out a non-compliant property for less than three months, the penalty payable will be the greater of £5,000 or 10% of the rateable value of the property
■ If a landlord rents out a non-compliant property for three months or more, the penalty will be whichever is the greater of £10,000 or 20% of the rateable value of the property
■ The maximum penalty is currently capped at £150,000
However, there are a number of exemptions and exclusions that will allow a landlord to let a substandard property. For example, leases for a term of less than six months or more than 99 years and properties that do not require an EPC are exempt from the regulations. Alternatively, a landlord can apply to register an exemption (see summary box), but it must be registered with the local authority in the PRS Register before 1 April 2018.
The MEES regulations will be enforced by local authorities, which will have the power to serve a compliance notice requiring a landlord to provide evidence of compliance. If it is satisfied that a landlord has breached the regulations, the local authority can issue a penalty notice (imposing a fine) and a publication penalty (which consists of publishing the details of the breach on the PRS Exemptions Register).
Landlords are likely to find that lenders are reluctant to lend on properties that fail to meet the minimum E rating unless a borrower agrees to take immediate steps to improve the building’s energy efficiency rating or agrees to the lender holding back a retention that is only released once the works have been completed.
Bear in mind that, over time, the minimum energy efficiency standard is likely to rise above the E rating, which means that landlords should also consider whether it is worth them doing more than the bare minimum and implement works to improve any buildings to bring them up to a C or a D rating.
Mina Kakkad is a director and solicitor at Harold Benjamin
COMMENT: Is this an opportunity for investment?
It would seem likely that the conservative or institutional investor would avoid properties that do not comply with the MEES regulations, writes Vijay Parikh, partner and head of commercial property and auctions at Harold Benjamin.
It would follow that pricing will be adjusted downward for such properties.
For the more entrepreneurial or savvy investor, does this afford an opportunity?
Speaking to one commercial client, he did not seem fazed by the new regulations and told me: “There are some reasonably priced alterations that can be undertaken that will increase a building’s energy efficiency. I would certainly look to acquire properties that do not comply with the regulations – at the right price.”
Perhaps the new regulations will provide an opportunity. Time will tell.
This article appears in the latest edition of the Property Auction Buyers’ Guide, published by EG on 7 October. For free access to more content for private investors, register here for your free digital edition of the guide.
