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Energy Performance – how will regulatory changes affect commercial lettings?

12 March 2018 • Danielle Leeming

Upcoming regulatory changes will have a significant impact on letting commercial properties and how leases are dealt with - both landlords and tenants will need to consider provisions to deal with them and ensure the effective management of commercial portfolios, write Danielle Leeming and Bhaven Chauhan

 The Energy Efficiency (Private Rented Property) Regulations 2015 (MEES Regulations) have introduced a number of key measures which affect private rented property in England and Wales, effective from 1st April 2018.

What is currently required?

The law requires owners of commercial properties to obtain an energy performance certificate (EPC) when a property is either let or sold. This requirement has been in place since August 2007, although there are a number of exceptions to the requirement to have an EPC.

What are the changes under the MEES Regulations?

The MEES Regulations impose a requirement on a landlord of non-domestic Private Rental (PR) property to reach minimum energy efficiency standards (MEES) of a band E rating on a valid EPC before they can be let. Where a property has an EPC rating of F or G, it is classed as a sub-standard property and falls below the MEES.

Where a property is sub-standard, a landlord must not:

  • grant a new tenancy, extend or renew an existing tenancy of a non-domestic PR property on or after 1 April 2018; or
  • continue to let non-domestic PR property on or after 1 April 2023.

What properties do the MEES Regulations apply to?

The MEES Regulations DO apply to non-domestic (PR) property which is:

  • let under a tenancy (granted for a term certain exceeding 6 months or a term up to 99 years); and
  • is not a dwelling; and
  • is in located England and Wales.

The MEES Regulations DO NOT apply to:

  • property being sold rather than let; and
  • owner-occupied property

How do the MEES Regulations affect us?

The MEES Regulations do not impose positive obligations on landlords to carry out energy efficiency improvement works to PR properties. However, if a landlord wishes to let a non-domestic property, they will have to undertake energy efficiency improvements which either:

  • improve the efficiency in the use of energy in the property and are listed in the Schedule to the Green Deal; or
  • the improvement must improve efficiency in the use of energy in the property and be listed in Table 6 of the Buildings Regulations Approved Document L2B.

The improvement must be identified as an improvement in a Green Deal report, recommendation report or surveyor’s report.

The MEES Regulations provide that works would qualify as relevant energy efficiency improvements where:

  • the improvements are wholly paid for under a Green Deal plan; or
  • where they are listed in Table 6 of the Buildings Regulations Approved Document L2B.

Who is responsible for paying for the energy efficiency improvements?

The energy improvements can be paid for by the landlord and may be able to be recouped from the tenant, providing the lease allows for this. At present the MEES Regulations do not prohibit this but market factors will also have an impact on whether such costs can be recovered from the tenant.

Where a property is vacant, or the tenant is not the direct customer of the electricity company and so is not deemed to be the bill payer, the liability will rest with the landlord.

However, where the landlord does not have the funds to pay for the improvements, they can use Green Deal finance. When Green Deal finance is used repayments fall on the bill payer, which will often be the tenant.

The improvements, once made, last for 5 years from the date of registration of their completion.
The introduction of the MEES Regulations do not allow a landlord to terminate a Lease or tenancy because the property falls below MEES, it merely puts the landlord in breach of the MEES Regulations and liable to enforcement action.

The MEES Regulations will also apply to underleases and so the landlord of that lease and any superior landlord will be required to meet MEES.

Enforcement

Part 3 of the MEES Regulations set out the enforcement methods for breaches of the MEES Regulations. The local Weights and Measures Authority are responsible for regulating non-domestic properties and Trading Standard Officers.

The Local Authority can serve a compliance notice requesting details of any lettings or tenancies at the property, a copy of the EPC for the property, copies of the tenancy agreements and any qualifying assessments in relation to the property. The landlord must be given a minimum of 1 month from the date of the compliance notice to provide the information requested.

The Local Authority can impose a financial penalty, a publication penalty or both where the Local Authority are satisfied that the landlord is or has been during the last 18 months letting a non-domestic property below an ‘E’ EPC rating or is in breach of the compliance notice.

For non-domestic properties where a sub-standard property has been let for less than 3 months, the financial penalty is the greater of £5,000 or 10% of the rateable value up to a maximum of £50,000.

For non-domestic properties where a sub-standard property has been let for 3 months or more, the financial penalty is the greater of £10,000 or 20% of the rateable value up to £150,000.

There are also penalties for registering false or misleading information in the Private Rented Section Exemption Register (PRS Exemption Register) and there is no cap on the total financial penalties for non-domestic properties where the landlord is in breach for letting a sub-standard property and giving false or misleading information for the PRS Exemption Register or breach of compliance notice which has wide reaching implications for landlords of commercial properties.

The Local Authority can chose to impose a publication penalty which will be listed in the PRS Exemption Register and include details of the landlord’s name and address, the property and the penalties imposed. Commercial landlords, particularly, social housing providers need to consider the impact any publicity could have on the reputation of their business.

Exemptions

The MEES Regulations require the Secretary of State to maintain a PRS Exemptions Register. The register details the property address, the name of the landlord, a copy of the EPC, any publication notice and any exemption being relied upon. Landlords can only rely on an exemption where it has been registered on the PRS Exemptions Register.

The exemptions available include:

  • Consent Exemption – which would be available to a landlord where the landlord has been unable to increase the EPC banding within the last 5 years because the tenant has refused to give its consent to the energy efficiency improvements being undertaken or where the tenant has refused to give confirmation as the bill payer of the electricity before the landlord can enter into any Green Deal funding arrangement;
  • Devaluation Exemption – this would be available to a landlord if in the last 5 years, the landlord has obtained a report from an independent surveyor which confirms that if the energy improvement works were undertaken, it would result in a reduction of more than 5% of the market value of the property or of the building which the property forms part of; or
  • Temporary Exemption – this would be available to a landlord until six months after the landlord becomes the landlord of the property or a court order is made for the grant of a lease but not under Part 2 of the LTA 1954.

None of the exemptions last indefinitely and so the onus is on the landlord to consider the energy efficiency of the property on a regular basis.

Future Developments

With the government’s continued push to improve energy efficiency and reduce carbon emissions and greenhouse gases, there is a possibility that the requirement for properties to have an EPC rating of ‘E’ or above could be increased to a higher band therefore continued monitoring of energy performance is vital.

Conclusion

The changes that will come into effect on 1st April 2018 will have a significant impact on whether commercial properties can be let in accordance with the MEES Regulations.

 

The changes that will come into place will also have an impact on the way leases are dealt with and both landlords and tenants will need to consider provisions to deal with them.

 

For more information, or if you own any commercial property and are concerned about how this may affect your portfolio, please contact our Commercial Real Estate Team.


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