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The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 are set to come into force on 1 April 2016 and will introduce a minimum energy efficiency standard (MEES). Commercial properties with an ‘F’ or ‘G’ Energy Performance Certificate rating will need to undergo works to improve their energy efficiency. The regulations will have considerable teeth. Non-compliance could lead to being ‘named and shamed’ and incurring a fine of up to £150,000.
As part of the government’s drive to comply with European and international environmental sustainability targets, energy saving ‘green’ policies have spread to commercial property. Although this may seem unnecessary to some, given the potential disruptions to commerce and the costs involved, the government estimates that 18% of privately rented commercial properties have an energy efficiency rating lower than ‘E’.
Scope and timescales
Landlords will need to satisfy MEES by either 1 April 2018 (for new lettings) or 1 April 2023 (for existing lettings). Not all commercial properties are affected however:
A landlord will commit a criminal offence if after 1 April 2018 it grants or renews a lease of a property with an Energy Performance Certificate rating lower than ‘E’. From 1 April 2023, MEES will apply to all existing leases.
Landlords will be relieved to hear that there are exemptions written into the regulations. Not all properties can be improved and, in some cases, tenants or lenders will be unwilling to allow improvements to be carried out.
All exemptions only last for 5 years and must be registered on the PRS Exemption Register. They can be applied for again on expiry of the five year period.
In brief, to qualify for an exemption it must be shown that:
Landlords with properties that fall within the scope of MEES should be thinking about making improvements now as the obligation to comply rests with them. Although the first deadline is over three years away, many existing leases or those being renewed or granted now, extend beyond 1 April 2018 and perhaps the even more critical date of 1 April 2023, which catches all existing leases.
Leases of affected properties will need to be reviewed. It will need to be established whether the landlord has rights of access to undertake the improvement works and the necessary rights to carry out such works.
Given the wide ranging financial and practical impact of MEES, landlords and tenants should try to formulate a plan of action to comply. Improvement works may disrupt a tenant’s business and consulting each other could be mutually beneficial. Also, obtaining a five year exemption may be in both parties’ interests.
Who will pay the bill?
Some, all or indeed none of the costs for the works could be recoverable under the lease, which is why both landlords and tenants need to be alert about the implications of MEES. The wording of service charge provisions and repairing covenants will therefore be key.
As the first deadline of 1 April 2018 looms closer and the market adapts accordingly, leases will need to give landlords the flexibility to deal with MEES.
It must not be forgotten that the energy targets projected by the government mean that MEES will not stop here. The minimum energy efficiency rating will be reviewed by the government in the future and it is more than likely that it will go up. Landlords will once again need to comply with the higher rating, or else fall foul of the criminal offences contained in MEES.