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Minimum Energy Efficiency Standard for commercial buildings (MEES)

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations have now received approval from both Houses of Parliament and will ensure that buildings rented for commercial use in the private sector meet minimum energy efficiency standards.

The most significant change brought about by the Regulations can be found in Part 3, which will come into force from 1 October 2016, and prescribes a minimum level of energy efficiency that must be met in order for a landlord to rent out a building.

Although the Regulations come into force from 1 October 2016, leases will not be caught by their provisions from this date. Instead, for the purposes of non-domestic leases, the Regulations will apply from 1 April 2018 to the grant of a new lease, lease extensions and renewals, and on or after 1 April 2023 to all leases including existing leases.

This new energy efficiency requirement is closely linked to the Energy Performance Certificate (EPC), which requires that the energy efficiency of a building is rated, allowing tenants to make informed energy performance decisions when choosing a building to rent. This rating is expressed on a scale from ‘A’ to ‘G’, with ‘A’ indicating that the building is very energy efficient and 'G' being the lowest rating.

 

Key points  

Scope

Property must be:

  • Non-domestic private rented property
  • In England and Wales
  • With a “valid” EPC

(reg 20, 22 of MEES Regs and section 42(1)(b) of the Energy Act 2011)

Minimum standard

‘E' Rating on EPC

No future trajectory

Implementation date

1 April 2018 - granting new tenancies

1 April 2023 - all existing tenancies caught

Exemptions

  • Not cost effective on seven year payback or under Green Deal Golden Rule
  • Consent for works not available
  • Expert states that measures will reduce property value by 5% or more
  • Expert states that wall insulation will damage the property
  • Temporary exemption for “forced” lettings 

Subject to exemptions being recorded on PRS Exemptions register

Exemptions subject to time limits

Penalties

Renting out a non-compliant property for less than three months - 10% of rateable value with a minimum penalty of £5,000 and a maximum penalty of £50,000 plus publication of non-compliance 

Renting out a non-compliant property for more than three months - 20% of rateable value with a minimum penalty of £10,000 and a maximum penalty of £150,000 plus publication of non-compliance

 

Timescale for implementation

From 1 April 2018: additional hurdles will have to be overcome in order to let commercial property.

From that date, where the letting prohibition contained in regulation 27 applies and the property has an EPC rating of F or G, a landlord should not grant certain types of tenancies of that property unless it can demonstrate that either:

(a) an exemption applies and that exemption has been registered in the PRS Exemptions Register; or

(b) there are no “relevant energy efficiency improvements” that can be made or it has undertaken   “relevant energy efficiency improvements” to the property.

From 1 April 2023: a landlord should not continue to let out such properties unless either (a) or (b) above applies.

Beyond 2023: the MEES Regulations do not provide for a future trajectory for the minimum level of energy efficiency but it is likely that the 'E' rating will be reduced in order to meet the UK’s legally binding carbon targets.

What we do know is that the Secretary of State must review the operation and effect of the MEES Regulations after five years, ie in 2020 (reg 4).

Scope of MEES letting prohibition

The letting prohibition (reg 27) relates only to “non-domestic PR Property” (defined in reg 20) which is “sub-standard” (defined in reg 22). As a result, in order to fall within the letting prohibition, the criteria set out below must apply.

The property must be situated in England and Wales. The letting prohibition does not apply to property situated elsewhere.

The property must be one that is required to have an EPC: if current or previous EPC regulations (Energy Performance of Buildings (England and Wales) Regulations 2012 or Energy Performance of Buildings (England and Wales) Regulations 2007) or the Building Regulations 2010 do not require a property to have an EPC, that property will not be caught by the letting prohibition. This takes the following property types outside the letting prohibition:

• properties which do not use energy to condition the indoor climate;

• certain listed buildings;

• buildings used as places of worship;

• temporary buildings with a time of use of two years or less;

• industrial sites, workshops and non-residential agricultural buildings with low energy demand;

• stand-alone buildings with a total useful floor area of less than 50 square metres;

• property which is to be demolished.

Unfortunately, it is not always easy to identify whether a property falls within one of the classes of buildings exempted from the EPC regime (and thus outside the letting prohibition). The Government’s EPC guidance on the EPC exemptions creates uncertainties and these uncertainties flow through to the MEES regime.

 

There must be a valid EPC: in order to fall within the letting prohibition, the property must be classed as “sub-standard” under regulation 22. That means there must be a “valid” EPC showing an F or G rating for the property. Accordingly, the letting prohibition does not apply where:

• the property does not actually have an EPC;

• there is an EPC but it is more than 10 years old.

Short lets and long leases are not caught. Regulation 20(3) takes the following outside the definition of “non-domestic property” and thus outside the letting prohibition:

• a tenancy granted for 99 years or more;

• a tenancy granted for a term not exceeding six months but only where:

• there is not a provision for renewing or extending the term beyond six months;

• the tenant has not already been in occupation for a continuous period of over 12 months.

Only tenancies are caught. The letting prohibition does not apply to:

• sales of commercial property nor to owner occupied commercial property;

• licence arrangements;

• tenancy at will (despite its name, it is not a tenancy as it does not have a term certain).

Tenancies falling within the prohibition include:

• those granted for more than six months but less than 99 years;

• those granted for less than six months where there is a provision to renew or extend the term;

• those granted for less than six months where, at the time the tenancy is granted, the tenant has been in occupation for more than 12 months;

• lease renewals and extensions;

• underleases;

• reversionary leases;

• overriding leases under LTCA 1995;

• those granted to a guarantor on a tenant’s insolvency;

• those granted pursuant to options to renew or extend;

• those granted by operation of law (eg deemed surrenders and re-grants).

Exemptions

Relevant energy efficiency improvements exemption (reg 28)

A landlord can let F and G rated property falling within the scope of the MEES regulations (without the possibility of a civil penalty) in any of the following circumstances:

• where he can demonstrate that there are no “relevant energy efficiency improvements” that can be made (reg 29(1)(b)); or

• where he can show that all available “relevant energy efficiency improvements” have been undertaken but the property still falls below an 'E' rating (reg 29(1)(a)).

“Relevant energy efficiency improvements” are defined in regulation 28. The provisions are complicated and reference also has to be made to section 49(4) of the Energy Act 2011. Essentially, the combined effect of these sections is that landlords only need to carry out improvements which satisfy all of the following criteria:

• the improvements must be of a type listed in either the Schedule to the Green Deal (Qualifying Energy Improvements) Order 2012 or Table 6 of the Building Regulations Approved Document L2B (reg 28(1)(a));

• the improvements must be recommended in a green deal report, an EPC recommendation report, or a report by an RICS surveyor (reg 28(1)(b)); and

• the improvements:

can be wholly paid for by a green deal plan (section 49(4)(b)(i) Energy Act 2011); or

(for improvements listed in Table 6 of the Building Regulations Approved Document L2B) will pay for themselves through energy bill savings over a seven year period (regs 28(3) to 28(8)).

In order to rely upon the above exemptions, the information specified in the Schedule to the MEES Regulations must be registered on the PRS Exemption Register. Furthermore, the exemption only lasts for five years (reg 29(2)).

Also note that landlords do not need to install wall insulation where an independent professional gives a written opinion advising that it is not an appropriate improvement because of the potential damage it would cause to the fabric or structure of the property (or the building it forms part of). Again the exemption is only available where the opinion has been registered on the PRS Exemption Register) (reg 28(3).

Lack of consent exemption (reg 31)

The MEES regulations do not require landlords to carry out improvements where necessary third party consents cannot be obtained or are subject to unreasonable conditions.

“Third party consent” is defined in regulation 2(1) and includes consents, approvals and permissions required from:

• planning authorities (eg planning, listed building and conservation area consents);

• a superior landlord or a freeholder;

• an existing tenant;

• neighbouring property owners/occupiers; and

• lenders.

In most cases, the landlord needs to use reasonable efforts to get the necessary consent.

In addition, the exemption will only be available where a registration has been made on the PRS Exemptions Register in accordance with the Schedule to the MEES Regulations.

The exemption is time limited and only lasts for a five year period.

Devaluation exemption (reg 32)

Landlords will not have to carry out improvement works where an independent surveyor says they would result in a reduction of more than 5% in the “market value” of the property.

Again the exemption will only be valid for a five year period and, in order to take advantage of it, a copy of the independent surveyor’s report will need to be registered on the PRS Exemptions Register.