Posted by Peter Foskett, Partner
Are you up to speed on energy efficiency regulations?
If you are an existing investor in commercial property, you will probably be very familiar with the Energy Efficiency Regulations 2015 and will have taken all appropriate steps to lessen their potential impact. If you haven’t or you are considering a property investment, then this may be for you.
The Regulations, officially titled Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015, begin to bite in relation to the letting of commercial properties on 1 April 2018.
What changes do the Regulations bring?
The Regulations introduce a Minimum Energy Efficiency Standard (MEES) for non- domestic private rented properties. They are designed to target properties in England and Wales with energy performance ratings of F or G which are identified following the commission of an Energy Performance Certificate (EPC).
An EPC will rate a property from Band A (very good) through to Band G (very poor). The minimum acceptable standard under MEES is Band E. A property that fails to achieve Band E is considered sub-standard.
As a commercial property landlord:
- from 1 April 2018, you will not be allowed to let a property to new tenants or renew a letting to existing tenants unless the EPC rating for the property is at least within Band E; and in addition
- from 1 April 2023, you will not be allowed to continue an existing commercial letting if the property has an EPC rating of Band F or G.
Are there any exemptions available?
The MEES Regulations only apply if the property is required to have an EPC. However, not all commercial properties are legally required to have one. Examples of buildings that are not affected by MEES Regulations are:
- those that are not required to have an EPC, e.g. industrial sites, workshops, non-residential agricultural buildings with low energy demand, certain listed buildings and those in conservation areas and holiday lets;
- standalone buildings with total useful floor area of less than 50 square metres;
- those that have an EPC under 10 years old or which lawfully have no EPC;
- temporary buildings with planned use of under two years; and
- places of worship and those used for religious purposes.
MEES Regulations will also not apply to tenancies:
- of less than 6 months (provided there is no tenant right to renew); and
- of over 99 years.
Even if your property does not require an EPC or, if it does and has one, it may be to your advantage to obtain an up to date EPC on a voluntary basis. Even if it reveals a rating of F or G you will not be required to carry out energy efficiency improvement works as a result. By knowing what the rating of your property is will inform you what steps you are going to have to take in the future, particularly if you have a tenant whose tenancy is going to shortly expire.
If you own a single unit with a mix of commercial and residential uses which is rated F or G, you need to take care to establish whether the letting is primarily domestic or non-domestic, and therefore whether and how the MEES Regulations will apply.
If your property is to be validly exempted from MEES, you must register the exemption (on a self-certification basis) on the Government’s central PRS Exemption Register. You will need to be very clear as to on what grounds you are claiming the exemption, as the Register is a public document and will be reviewed for the purposes of enforcement.
There is an important exception to the MEES Regulations which allows you to create a letting even if your property is sub-standard. If you have made all the relevant energy efficiency improvements to the property that can reasonably be made (or there are none that can be made) and the property still remains sub-standard, then MEES will not apply for the next five years. Again, you must register this exemption on the PRS Exemptions Register. When the five years has expired, further efforts will need to be made to bring the property up to the acceptable standard. If, again, all the relevant energy efficiency improvements that can reasonably be made have been made, and yet minimum Band E rating cannot be achieved, then a further exemption can be registered.
There are three further major exemptions which allow you to let a sub-standard property. You can let a sub-standard property:
- if consent for the necessary efficiency works is required from e.g. a superior landlord, lender, tenant or planning authority, but such consent cannot be obtained, despite reasonable efforts having been made, or where conditions have been attached to the consent that cannot reasonably be complied with; or
- if an independent surveyor advises that energy efficiency measures, if carried out, would reduce the market value of the property by more than five per cent; or
- if an independent assessor or surveyor determines that the cost of the energy efficiency works will not pay for themselves through energy savings over the next seven years.
If you claim any of these exemptions, then once again you must register them on the PRS Exemption Register. Any exemption claimed will last for five years only and is personal to you, the landlord. It will cease to have effect if you transfer the property to a new owner.
How are MEES Regulations enforced and what are the penalties?
Local Weights and Measures Authorities (LWMA) are responsible for the enforcement of the MEES Regulations in their area. If an LWMA believes that a breach of the Regulations has occurred, it may serve you with a compliance notice requesting information to assist them in determining whether a breach has indeed occurred.
Significant penalties may be imposed if the Regulations are breached:
- if you have let a sub-standard property for less than three months when action is taken, you may be fined up to £5,000 or 10% of the rateable value of the property (whichever is the greater), up to a maximum of £50,000;
- if you have let a sub-standard property for more than three months when action is taken, you may be fined up to £10,000 or 20% of rateable value (whichever is the greater), up to a maximum of £150,000;
- if you provide false or misleading information on the PRS Exemption Register, you may be fined up to £5,000;
- and finally, if you fail to comply with a compliance notice, you may be fined up to £5,000.
What are the further consequences of non-compliance?
Quite apart from the unwelcome prospect of receiving a compliance notice and the possibility of being fined, as a landlord, you are likely to face some commercial disadvantages from not knowing or failing to comply with the Regulations. Some of these are:
- loss of rent while energy efficiency works are carried out after 1 April 2018;
- your property becoming difficult to market either for sale or rent with consequent loss in value;
- secured lending criteria negatively affected;
- a lack of appropriate provision in leases to cover the need for entry to the premises to carry out energy efficiency works;
- no suitable provisions being added to your lease to enable recovery of cost of energy efficiency works from your tenant; and
- no appropriate restrictions being included in your lease regarding tenant subletting.
Need help with Minimum Energy Efficiency Standard Regulations compliance in the run up to April? Get in touch with our expert Commercial Property team on:
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