It is a matter of months until the MEES (Minimum Energy Efficiency Standards) Regulations come into force on 1st April 2018. Prudent landlords should be preparing for the change.
Under the new Regulations, subject to a few exceptions, private sector landlords of properties will not be able to grant new leases of properties to new or existing tenants with an Energy Performance Certificate (EPC) band rating of F or G. These currently account for about 18% of non-domestic properties according to Government statistics.
EPCs last for 10 years. The first EPCs were carried out in 2008. Those early EPCs will therefore be due for renewal on new lettings in 2018. Landlords may well consider that they are “safe” from the penalties of the new Regulations as their early EPCs showed an EPC band rating of D or E so they may expect any renewed EPC to be similar (provided no negative alterations to the building have been made in the intervening 10 years). This may be the case, but properties with original band ratings of D or E (accounting for about 47% of all such properties) are at risk. The EPC rating could fall to bands F or G on a new energy inspection by an energy assessor as, since 2008, the software used for energy assessment has increased in its accuracy, and, the Building Regulations on efficiency have become more rigorous.
As a consequence of this risk, some landlords are actively reviewing their property portfolios and having energy assessments carried out now (but not necessarily registered) and where improved ratings are needed, they are then carrying out the recommended works to improve the energy efficiency of their properties and hence those ratings and then having the properties reassessed. This way they are proactively dealing with the issue.
Also, landlords are inserting covenants in their new leases imposing obligations on the tenant not to do anything to diminish the EPC ratings of the properties. Landlords cannot try to impose the liability on tenants under the general provisions already standard in leases and recover costs via a service charge (justified as improvements required under legislation) as the Regulations do not impose any positive obligations on the landlord to improve the energy efficiency of buildings; the Regulations just prohibit certain properties being let.
Some sceptical landlords may consider that Brexit will save the day but, unfortunately for them, this is not the case. As recently as February 2017, the government published guidelines clarifying the MEES Regulations and enforcement procedures showing its commitment to improved energy efficiency. The penalty for breach is a maximum £150,000 depending on rateable value of the property.
The important thing is to be prepared. As a landlord, if you are unable to let your property as the EPC band rating is too low, it may take months to rectify the position by making alterations or additions to the property to improve its EPC band rating. If the property cannot be let during the time, income from the property will be lost and until the works are carried out the investment value of the freehold will be detrimentally affected.
One last point to note for the future: the part of the Regulations taking effect after April 2023 will apply to existing lettings too. Any new or existing letting (subject to a few exceptions) of a building with an EPC banding of F or G will be in breach of the Regulations. To assist you, please see this link to the Government guidance on the minimum standards: https://www.gov.uk/government/publications/the-non-domestic-private-rented-property-minimum-standard-landlord-guidance
For further information and advice contact Liz Brady, Partner specialising in Commercial Property on 01227 763939.