What Must Landlords and Tenants Do to Prepare

With less than six months to go until existing lettings of F and G rated properties become unlawful, occupiers and landlords alike will need to devise an action plan. We look at the legislative requirements, the potential exemptions and the impact of any relevant lease drafting. These will all be important factors in determining what works need to be done and who will pay.

Legislative requirements

The Energy Act 2011 contains provisions that placed a duty on the Secretary of State to bring in regulations (now known as the minimum energy efficiency standard regulations, or “MEES” regulations) to improve the energy efficiency of buildings in the domestic and non-domestic private rented sector in England and Wales.

The MEES regulations currently set the minimum level of energy efficiency for a building at an Energy Performance Certificate (“EPC”) rating of at least band E. Subject to certain exceptions, the MEES regulations impose restrictions on lettings. Since April 2018 it has been unlawful to let non-compliant buildings, applying to the grant of new leases and lease renewals, and from 1 April 2023 it will be unlawful to continue to let non-compliant buildings. Many leased commercial premises will fail to meet these minimum requirements. And there is more to come. The government is proposing to raise the EPC rating requirement for commercial property to C by 2027 and B by 2030, with the volume of space failing to meet these standards increasing dramatically.  

Failure to comply does not affect the validity of any lease which is granted but landlords who are in breach of the MEES regulations will be liable to a civil penalty. There is a publication penalty and potentially significant financial penalties for leasing a non-compliant property. These financial penalties can be imposed to an amount not exceeding £5,000 in relation to domestic property and not exceeding £150,000 for non-domestic property.

Exceptions and potential exemptions

MEES regulations impose restrictions on lettings, but subject to exceptions. All non-domestic property will be included unless the property:

• Is not legally required to have an EPC
• Is let on a tenancy granted for a term of 99 years or more
• Is let on a tenancy for a term of 6 months or less (unless the tenant has already been in occupation for 12 months or more or there is provision for extending the term).

MEES regulations impose restrictions on lettings, but subject to exemptions.  For an exemption to apply the conditions for it must be satisfied and the landlord must register the exemption on a centralised public register. Most exemptions last for 5 years. Potential exemptions  include the following:

• There are no further relevant improvements that can be made - all cost effective energy efficiency improvements have been made to the property or there are no cost effective energy efficiency improvements that can be made to the property. There is a 7 year payback test, the energy efficiency improvements would not achieve energy cost savings equal or greater than the capital cost of the improvement works spread over a 7 year period
• Property devaluation -the energy efficiency improvements proposed would result in a reduction in the value of the property by 5% or more
• Third party consent - any necessary third party consents required to carry out the energy efficiency improvement works cannot be obtained despite reasonable efforts to obtain such consent. Relevant consents that may be required include consent from a superior landlord, planning authority, lender or tenant
• Temporary 6 month extension – in certain limited circumstances the landlord will have 6 months from the date it became the landlord to comply.

Impact on any relevant lease drafting

There are a number of considerations which arise for landlords and tenants in relation to energy efficiency and EPCs.

Alterations

A landlord will want to restrict a tenant’s ability to make alterations to a premises that would have an adverse effect on the energy efficiency of the building.  Where works may impact upon the energy rating of the premises, the landlord may require the tenant to either commission an EPC from an assessor approved by the landlord or pay the landlord’s costs of commissioning an EPC. It is in the best interests of a landlord to retain control of the process of obtaining any new EPC for its building.

Reinstatement

Lease provisions usually require the tenant to keep the premises in good repair and condition and to yield up the premises to the landlord at the end of the lease in the repair and condition required by the lease.

A landlord should be aware that a tenant may seek to take advantage of the MEES regulations when yielding up the premises by commissioning an EPC, obtaining an EPC rating of F or G, and the tenant then argues that any repairs they would typically carry out will be superseded by works to improve the building’s EPC rating that the landlord will have to carry out in order to re-let the premises. Drafting in the lease which restricts a tenant’s ability to obtain an EPC should help a landlord to deal with this.

A tenant should be aware that a landlord may attempt to expand the reinstatement provisions with a potentially onerous requirement that the tenant yields up the premises at the end of the lease in a condition that complies with the MEES regulations.

Compliance with MEES

A landlord cannot force a tenant to improve the energy rating of a premises.  The usual statutory compliance clause in a lease requiring the tenant to observe and comply with legislation affecting the occupation and use of the premises does not oblige a tenant to carry out any works to upgrade a premises. The usual repairing provisions in a lease do not require a tenant to undertake energy improvement works. Provisions that seek to compel the tenant to improve the energy performance or energy rating of a premises may be regarded as onerous.

Service charge

The extent to which a landlord can recover MEES-related costs from a tenant through the service charge is a matter of contract and will depend on the wording of the lease.  Service charge clauses usually provide for landlords to recover repair and maintenance costs, but not improvements costs. A landlord may seek to include specific rights to recover energy efficiency improvement costs. The RICS Professional Statement on Service Charges in Commercial Property (1^st ed.) provides that subject to the terms of the lease and the principles set out in the professional statement, any subsequent costs of improving energy efficiency might be a legitimate service charge item, provided that there is a proportionate cost benefit to the tenant. The tenant should look out for service charge clauses which seek to provide for the recovery of such costs in a less obvious way by linking the recovery of costs to works required “to avoid any penalty or imposition relating to the letting or continued letting of the premises”.

With the imminent arrival of the MEES trigger date in April 2023, time is running out – so landlords (in particular) and tenants need to get prepared and devise a plan of action if not already in place.

A version of this article first appeared in Co Star on 24/10.