Gemma James looks at the revised property energy performance regulations coming into effect in April 2018.
A longer version of the article is published in June issue of BIFALink magazine.
An Energy Performance Certificate (“EPC”) is no longer just a pretty piece of paper with bright colours and recommendations for improving the energy efficiency of a building. Previously, a low rating may have simply led a tenant to expect higher energy bills or use it as a pre-letting bargaining chip to negotiate building improvements or rent adjustments. Now the implications are much more serious for properties with EPC ratings of F and G and potentially D and E.
The Minimum Energy Efficiency Standards (“MEES”) were introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.
As from 1 April 2018, landlords will not be able to grant, extend or renew leases of buildings with ratings of F or G and will have to improve them to a higher standard before being able to do so.
From 1 April 2023, this will extend to existing lettings, so that they cannot continue unless a building is improved to at least an E rating.
Logistics premises are often not energy efficient, so yours could be affected unless it falls within an exclusion or exemption (seek expert advice if in doubt).
Cautions and Precautions for Landlords
- Failure to comply with the Regulations could lead to a penalty notice and fine (being the greater of £5,000 or 10% of the property’s rateable value up to £50,000).
- A building previously graded D or E could be downgraded to F or G when a new Certificate is issued because of changes in assessment methods and building standards over the years. EPC’s only last a maximum of 10 years. If downgraded, this could leave you at the end of a lease with an unlettable premises and a tenant arguing that any dilapidations claim is diminished because the works required for compliance with the MEES overrule any repair works for which the tenant otherwise might have been liable.
- Keep an eye on timing, because renewing a D or E rated EPC before its 10 year expiry could unnecessarily bring forward the need for improvements if the new EPC downgrades it to F or G. Consider prohibiting the tenant from obtaining a new EPC itself.
- Check your lease contains a rent review assumption that the property is available immediately for the permitted use. This might counter any tenant’s argument that a new rent should be lower where the building is substandard.
- If your building is exempt, ensure that you register it on the Exemptions Register by 1 April 2018.
- Check the service charge provisions in any lease and try to ensure any improvement costs can be clawed back from the tenant as service charge. Try to reserve a right in the lease to enter the property to carry out energy efficiency improvements.
- Consider whether to provide that the tenant is liable for all energy efficiency improvements required to ensure the building complies with MEES Regulations. A mere reliance on the usual lease clause requiring the tenant to comply with statute is insufficient because the MEES Regulations impose their duty on the landlord, not the tenant.
- Limit the tenant’s alterations rights so that it could not carry out works which might lower the EPC rating.
Cautions and Precautions for Tenants
- A low-rated or subsequent downgrade of an EPC to an F or G rating could damage the tenant’s ability to sublet or assign.
- If a landlord tries to make you bear the costs of energy efficiency improvements, argue that the Regulations override and supersede the tenant’s repair obligations in the lease and now fall entirely as the landlord’s responsibility.
- If a property is low-rated, argue at rent review that the new rent should be low because the building is not lettable and improvement works will disrupt your business.
- If improvements are required, check the lease service charge provisions to assess the risk of the landlord recouping works costs from you.
Landlords and tenants should be aware of the likely costs and complications as a result of the MEES Regulations. Be prepared, heed the cautions, and take precautions!
Gemma James is a Partner in the Commercial Property Department at Mundays LLP and can be contacted on 01932 590645 or firstname.lastname@example.org