Gateley : Letting commercial properties with an F or G rating from April 2018

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If you are a landlord of a commercial property in England or Wales with an F or G rating on an EPC and you want to grant a lease after 1 April, you will have to comply with new regulations or risk being fined.

The MEES regulations and what they mean

The regulations[1] provide that:

From 1^st April 2018 à a landlord cannot lawfully grant a lease of a non-domestic property that has an F or G rating on an EPC unless it has carried out cost-effective energy saving measures or claimed an exemption - and this includes lease renewals to existing tenants.

From 1^st April 2023 à a landlord will not be able to continue to let a non-domestic property with an F or G rating unless it has carried out cost-effective energy saving measures or claimed an exemption - so this applies to existing leases.

The Regulations also apply to residential properties but this blog just deals with non-domestic properties.

MEES apply to

Leases granted for more than six months but less than 99 years of non-domestic properties requiring an EPC and have an F or G rating.

The regulations do not apply to leases of six months or less unless:

- at the time of grant the tenant has been in occupation for more than 12 months (for example, with back to back short leases); or

- the lease contains a provision to renew it beyond six months.

Cost-effective energy saving measures

Where a commercial property has an F or G rating, a landlord should seek specialist advice from an energy assessor as to what cost- effective works should be carried out. The idea behind the works is that they must pay for themselves through savings in energy bills over seven years - if they don't, then they are not regarded as 'cost-effective' and the landlord does not have to carry them out. For example, a landlord may be advised to spend £1000 on loft insulation which leads to a saving of £200 per year on heating bills. This would be classed as cost-effective work. But if the work would cost in excess of £1400 (in this example), then the insulation would not be regarded as cost-effective and the Landlord would not be obliged to do it.

The Regulations do not require the cost-effective works to achieve an E rating; the obligation is to carry out identified cost-effective works. However, it makes sense to do the required works to achieve an E rating or better so that the Regulations will not apply going forward.

If, having carried out the cost-effective works, the property does not achieve an E rating or better, the landlord will have to claim an exemption in order to grant a lease and register the exemption on the Government's online PRS Exemption Register. The exemption will only last for five years and then the landlord will have to go through the process again.

Exemptions

1) Cost-effective measures undertaken but still F or G rating à a landlord will have to provide details of improvements made. If some are not cost-effective it will have to provide three separate quotes to demonstrate that the recommended measures do not meet the seven year payback test.

2) Third party consent à where consent for the measures is required from persons such as a tenant, a lender, a superior landlord or a planning authority but is refused; or unreasonable conditions have been attached to a consent.

3) Devaluation à where an independent surveyor's report confirms that the installation of specific energy efficiency measures would result in a reduction in the value of the property by more than 5%.

4) Unsuitable wall insulation measures à where a report from a suitably qualified person advises that wall insulation is not suitable due to its potential negative impact on the fabric or structure of the property.

5) Six month exemption à this may be claimed where a party has become a landlord suddenly so it would be unreasonable for them to have to comply with the Regulations immediately e.g where a renewal lease has been granted under the Landlord and Tenant Act 1954. The six months exemption starts from the date when they become the landlord.

NOTE: All exemptions must be evidenced and registered on the PRS Exemptions Register before the lease is granted. Exemptions 1) to 4) will only be valid for five years, although where the exemption is for lack of tenant consent and the tenant changes within the five years, the exemption will end at that point. Exemptions do not pass to a new owner on the sale of a property.

Enforcement and non-compliance

Local trading standards departments will enforce the Regulations. Non-compliance can result in penalties of between £5,000 and £150,000 depending on the length of the non-compliance and the rateable value of the property.

What steps should you take now?

Landlords should identify which new leases are to be completed on or after 1 April and check whether any of the properties have an F or G rating on the EPC. Carrying out works and claiming exemptions take time so act now to avoid delay in being able to grant leases.

Further info

Government guidance: The Non-Domestic Private Rented Property Minimum Standard

PRS Exemptions Register

[1] Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.

This blog post was written by Sally Newton.