Paul Beanlands
Posted on 26 Jun 2018

The minimum energy efficiency standards - part three of the Regulations now in force

Regulations were originally introduced under the Energy Act 2011, but the minimum energy efficiency standards (MEES) were introduced in 2015 (The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015) and prohibit the letting of properties with an Energy Performance Certificate rating below E (i.e. those currently rated F or G).

Key dates

  • From 1 April 2018: unlawful to grant, extend or renew a lease of properties with an Energy Performance Certificate 'EPC' rating of F or G (Part three of the Regulations)
  • From 1 April 2020: unlawful to continue letting a domestic property with an EPC rating of F or G
  • From 1 April 2023: unlawful to continue letting a non-domestic property with an EPC rating of F or G

Exclusions

  • Leases of six months or less (but only where the tenant does not occupy the property for 12 months or more) and leases of 99 years or more.
  • Where a building is already exempt from obtaining an EPC (e.g. a listed building) or an EPC is over 10 years old.
  • Any social housing

Exemptions

The exemptions below are valid for five years only after which the Landlord must carry out the works or re-apply. Exemptions are only recognised if the landlord registers them on the PRS Exemptions Register and are personal to the specific landlord.

  • Where all relevant energy efficiency improvements have been undertaken, or where none exist where the cost would pay for itself with energy savings over seven years. This is tested on whether the expected energy bill savings exceed or equal the cost of works
  • Domestic properties only: all relevant energy efficiency improvements have been made that can be wholly financed by other means (e.g. via the Green Deal or Energy Saving Trust schemes)
  • Where the Landlord is itself a tenant and has been unable to obtain the consent of other relevant parties (Local Authority, Superior Landlord etc.). Beware - the exemption will only apply to the element of the works requiring the superior Landlord's consent.  All other aspects of the works need to be carried out
  • If improvements cause a 5% or more decrease in the market value of the property (as judged by an independent surveyor)
  • Wall insulation works are exempted where works would adversely affect the structure
  • A purchaser of a non-compliant lease gets a six month exemption period.

Temporary exemptions

Where a lease is granted:

  • Out of contractual obligation (e.g. an option agreement)
  • Where a former tenant or guarantor obtains a lease through non-payment of rent by the current tenant
  • On a surrender and re-grant
  • Renewals under the 1954 Landlord and Tenant Act

Penalties

Financial penalties for non-compliance: up to £5,000 for domestic properties and up to £150,000 for non-residential and publication on the PRS Exemptions Register.

Impact of the Regulations

  • Landlords: short term disruption and capital expenditure; more opportunity to enter into green leases; potential increase in rental and asset value;
  • Tenants: potential point of negotiation at rent review; reduction in energy bills; effect on dilapidations if landlord needs to carry out works;
  • Lenders: reduction in value of security; direct impact if enforce security; further borrowing required by landlords.

Conclusion

Whilst it should be noted that the Regulations do not impose a positive obligation on landlords to carry out energy efficiency improvement works, the Regulations certainly provide a step in the right direction and the minimum standard to which buildings must comply (rating of E) could of course rise in the future.

For more information, please contact Paul Beanlands, Partner in the Real Estate team, on Paul.Beanlands@michelmores.com or +44 (0)207 659 4659.