Time is running out for landlords to mitigate the impacts of MEES – the Minimum Energy Efficiency Standards – that come into effect on 1 April 2018. Richard Frost of GVA in Cardiff looks at the implications:
From 1 April, granting of a new lease (as well as a lease renewal) on a non-domestic or domestic property will require the property to achieve a minimum ‘E’ EPC (energy performance certificate) rating – and it will be unlawful not to do so. This creates significant challenges to large and small landlords alike. Whilst the legislation has been in place since 2015, few property owners have taken proactive steps to mitigate the impact of MEES and to ensure their properties achieve the ‘E’ rating.
The regulations are designed to ensure the least energy efficient properties in England and Wales reduce their contribution to greenhouse gas emissions, and unnecessary cost on business and the economy in general.
The requirements do have the real potential to have an impact on a property’s value and as a result, a consequential increase in the loan to value ratio; increase void rates; require capital expenditure to raise the property above the minimum standard; or to offer additional rent-free periods in order for the tenant to make the required improvement themselves.
If a landlord rents out a property that is in breach of the MEES regulations, the penalty for the first three-month period will be the equivalent of 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000. After three months, the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000. Where a property is let in breach of the MEES regulations or where a penalty is imposed, the lease between the landlord and the tenant remains valid.
There are, of course, opportunities for landlords and tenants to improve the energy efficiency of their building assets and reduce the utility bills shared for the benefit of both parties. This also provides the potential to increase rental and asset value through making energy efficiency improvements and combining these with other refurbishments.
Establishing whether a building and tenancy fall under MEES is complicated. It does not apply for example when:
- buildings are not required to have an EPC, such as industrial sites (where energy demand is low), workshops, non-residential agricultural buildings with a low energy demand, temporary properties and holidays lets
- the tenancy is of less than 6 months (with no right of renewal)
- buildings have an EPC over 10 years old or where there is no EPC
- tenancies are over 99 years.
There are also exemptions to the regulations which include:
- The identified improvement measures are not cost-effective within a seven-year payback
- Despite reasonable efforts, the landlord cannot obtain necessary consents to install the required energy efficiency improvements, including from tenants, lenders and superior landlords.
- A relevant suitably qualified expert provides written advice that the measures will reduce a property’s value by 5% or more, or that wall insulation required to improve the property will damage the property.
Where a landlord considers an exemption applies, allowing them to let their property below an ‘E’ EPC rating, the landlord will need to log this on a centralised register – the “Private Rented Sector (PRS) Exemptions Register”.
The exemptions are valid for five years only and cannot be transferred to a new landlord.
What can landlords do:
- Review their portfolios to understand which properties are within scope of the MEES regulations and whether exemptions might apply
- Review their leases to understand how the terms may fit with the MEES timetable and the rights under the lease to potentially mitigate the obligations
- Carry out energy assessments to establish whether the EPC ratings for their properties are correct and accurate
Whilst there will be many challenges to test us in 2018 and beyond, MEES provides a considerable potential impact on the lettings market going forward for all those involved in the property industry.