The Minimum Energy Efficiency Standard: what is it and how will it affect you?

As from April 2018 the Minimum Energy Efficiency Standard (MEES) could prevent landlords from letting properties with low EPC ratings.

From April 2018 it will be unlawful for a landlord to grant a new lease of a building with an Energy Performance Certificate (EPC) rating of less than E.  This new energy efficiency standard brings with it a number of challenges for landlords and property investors.  Read on to find out more.

What is the Minimum Energy Efficiency Standard (MEES)?

As the name suggests, the MEES, which was introduced in March 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations), is a new energy efficiency standard for rented properties that prevents landlords from letting properties where the EPC rating falls below E.  When the legislation was enacted the implementation dates for MEES seemed a distant prospect; however the first key implementation date for commercial property is approaching fast with further, more onerous requirements following rapidly on its heels. 

Dates for the diary

• From 1 April 2018 it will be unlawful for a landlord to grant a new lease of residential or commercial property with an EPC rating of less than E;
• From 1 April 2020 the MEES will apply to all residential lettings, meaning that in addition to the prohibition on granting new leases below the minimum standard, the Regulations will apply to leases that have already been granted, so you cannot continue to let a residential property without bringing the EPC rating up to E or above.
• Finally, from 1 April 2023 the Regulations will be extended to cover all commercial letting and it will therefore be unlawful to continue to let any properties with an EPC rating of below E.

Do the Regulations apply to all properties and what are the penalties for failing to comply?

The Regulations will apply to most buildings but the following are excluded from MEES entirely;

• Properties that are not required to have an EPC e.g. some listed buildings and buildings that are due to be demolished;
• A property let for a term of six months or less (unless there is a right of renewal beyond six months or at the time of the grant of the lease the tenant had already been in occupation of the property for more than 12 months) or where the property is let for a term of 99 years or more.
• A property occupied under a licence to occupy, provided that it truly is a licence and not a lease.

There are also a number of exemptions from the requirement to comply with MEES.  To be valid the exemption must be registered by 1 April 2018 on the Government's PRS Exemptions Register and will only subsist for 5 years.  The exemptions available include:

• If the landlord has carried out all recommended improvement works but the property still has an EPC rating of F or G;
• The recommended improvements do not pay for themselves in energy savings over a period of 7 years (calculated by reference to a detailed formula contained in the Regulations);
• The landlord cannot obtain third party consent to the required works despite using reasonable endeavours to obtain it, or where consent has been given subject to a condition that cannot reasonably be complied with; and
• A suitably qualified expert provides written evidence that the recommended improvements would devalue the property by 5% or more or would damage the fabric or structure of the property.

There are also a number of temporary exemptions (which again need to be registered) designed to give landlords a 6 month moratorium on enforcement in circumstances where they have recently taken on a lease, for example where a lease has been renewed or the landlord has bought a property subject to an existing lease.  Before the expiry of the 6 month exemption the landlord must either carry out any requisite energy efficiency improvements or register a 5 year exemption if there are qualifying circumstances.

The Regulations will be enforced by local authorities and landlords could face significant fines for non-compliance.  The penalty for letting a commercial property in breach of the Regulations for less than three months will be equivalent to 10 % of the property's rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000.  After three months the penalty increases to 20% of the rateable value, with a minimum of £10,000 and a maximum of £150,000.  The penalty for breaching the Regulations in relation to a residential property is capped at £4,000.  No penalties can be levied against the tenant and nor can the statutory compliance clauses in leases be used to force tenants to undertake the improvements.  It should also be noted that the lease will remain valid meaning that the tenant will still be liable to pay the rent and observe the lease covenants.

Next steps

The Regulations could have significant financial implications for landlords as a result of the costs of upgrading non-compliant buildings coupled with a potential loss of rental income if a property cannot be let.  It is imperative therefore that landlords take action now to understand their potential exposure. 

As a first step, landlords may wish to consider reviewing their property portfolios and putting together an EPC register to ascertain whether there are any compliance failures and if they may be able to register any exemptions. Understanding lease expiry and break dates and how these fit in with the implementation timetable for MEES will also be key to assessing and minimising the impact of the Regulations.   

Investors will also need to think beyond the property letting perspective as a low EPC rating could impact on the ability to sell investments for full market value.  Exemptions do not transfer on a sale of a property so where an exemption has been registered a buyer will want to see full details and to the extent it cannot or does not want to undertake improvement works they will need to ensure that where possible, they register their own exemption within six months of the purchase.  If an exemption cannot be registered by the buyer then a reduction in the purchase price equivalent to the cost of improvement works may be negotiated.

In summary

As the first main implementation date for MEES is rapidly approaching landlords need to act now to assess the risk that the Regulations pose. Wrigleys would be happy to work with you to prepare for the impending changes.