MEES – Will your property be lettable after April 2018?

Overview

The Minimum Energy Efficiency Standards (MEES) were introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations) and will apply to private rented commercial and domestic premises from 1 April 2018. Landlords who grant new leases or renewals from this date will need to ensure that their properties meet minimum energy requirements, and if they do not, they must carry out works or register an exemption. 

Although MEES apply to both commercial and domestic properties, this article focuses on commercial properties.

Energy Efficiency

The energy efficiency of a property is determined by the asset rating it achieves in an energy performance certificate (EPC). This asset rating places the property on a sliding scale between A and G, with A being the most energy efficient and G being the least energy efficient.

New Lettings and Renewals

MEES will make it unlawful for landlords of properties within the scope of the Regulations to grant new tenancies or renewals (including sublettings) where the property is ‘substandard’ - where it has an EPC rating of F or G - unless an exemption has been registered. Landlords may therefore need to carry out improvements to their buildings in order to meet these new requirements.

The fact that a property is ‘substandard’ does not affect any right of a tenant to renew a lease. Where a property is let in breach of MEES, the lease remains valid and in force, but the landlord may face enforcement action.

Current tenancies

MEES will apply from 1 April 2023 to all commercial lettings, including existing lettings (and from 1 April 2020 to all domestic lettings). From these dates, it would be a breach of the Regulations for landlords to continue to let any substandard properties (subject to exemptions).

There may be implications from April 2018 for existing tenancies, for example the valuation of a property which has an EPC rating of F or G may decrease, affecting upcoming rent reviews as well as overall marketability. We are already seeing property lenders requiring the provision of EPCs with an asset rating of E or higher for investment properties that will comprise security for a loan indicating perhaps that substandard properties will become harder to mortgage.

Exemptions

MEES does not apply to properties which do not require an EPC (for example, certain listed properties and properties that use no energy to condition the indoor climate) or to leases granted for a term of 99 years or more or six months or less.

There are also various exemptions that landlords can rely on. These exemptions last for five years and must be lodged at a centralised register created by the Government, on a self-certification basis. 

The exemptions available are not transferable on a sale of a property, and include:

• consent to undertake works being refused by a third party (for example, a local planning authority) or tenant
• written advice that the improvements would result in a devaluation of the property by 5% or more or that the works would damage the property
• determination that all cost-effective improvements have been carried out and a rating of E has not been achieved, and
• determination that energy efficiency improvements would not pay for themselves through energy savings within seven years. 

There is also six month temporary exemption where a renewal lease is granted under the Landlord and Tenant Act 1954.

Non-compliance

Penalties for non-compliance are civil only and will be enforced by Trading Standard Officers. They will be based on the rateable value of the property, up to a maximum of £150,000 per occasion. 

Moving Forwards

MEES are set for review in 2020 which is likely to result in a tightening of the ratings. There are suggestions that the minimum standard may rise to D by 2025, and C by 2030. As there are clearly financial implications of MEES – the potential loss of value and/or rental income and the cost of upgrading non-compliant properties, landlords should consider auditing their property portfolios now.  An understanding of which of their properties fall within MEES, whether exemptions can be relied upon and their lease provisions (for example, rights to carry out works, recovery of costs) as well as the likely costs of any required upgrades should give landlords a clearer picture of how MEES will impact on them come April when they start to apply.

This article was written by Michelle Noble. For more information please contact Michelle on +44 (0)1483 252 522 or at michelle.noble@crsblaw.com.