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With the Minimum Energy Efficiency Standards (MEE’s) set to bite from 2018, landlords will need to consider the financial consequences for commercial properties within their portfolios with an energy performance rating of F or G.

Background

Following the imposition of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, from 1 April 2018 landlords who fail to comply with the MEE’s created by the Regulations, could be faced with civil penalties ranging between £5,000.00 and £150,000.00.

Essentially, from 1 April 2018 it will be unlawful to create a new letting or renew a lease of a commercial property with an energy efficiency rating of F or G. In addition, from 1 April 2023, it will be unlawful for leases to be in existence over a commercial property with a rating of F or G. There have also been suggestions from the government that this threshold could be increased in the following years.

Early considerations and steps for landlords

Review portfolio

Given compliance with the regulations will fall to landlords, an initial step to take at this stage would be to review property portfolios and determine which, if any, hold a rating of F and G, and in turn what improvement works can be carried out at this early stage to avoid this risk of a future unlawful letting.

Negotiate with incoming tenants

For landlords seeking to let properties with a sub-standard rating immediately prior to 2018, or for a term which would go beyond 2023, another option may be to negotiate lease terms which would allow the improvement works to take place.

For example, it could be agreed that an incoming tenant carries out the improvement works to enhance the rating of the property in exchange for a rent – free period within the lease. Landlords may also seek to agree provisions relating to their access to the property in order for them to carry out the works, which will also be advantageous to the tenant in any event, as they would benefit from lower utility rates.

Consider whether an exception applies

  • If the landlord is bound to complete a lease as the tenant has a right to renew under the Landlord and Tenant 1954 Act, or because there is an agreement for lease already in place for example, then the regulations would not automatically bite, and the landlord would instead have six months to comply.
  • Where the works required to improve the sub-standard rating would lower the market value of the property by more than 5%, then the landlord would benefit from a five year exception.
  • If the landlord is unable to obtain consent to carry out the works required to improve the rating from parties who are able to prevent the works, such as lenders and freeholders, or if the consent is obtained but subject to condition/s that the landlord is unable to reasonably satisfy.
  • Where the landlord has carried out cost effective improvement works and the subsequent expected savings in energy costs exceed or equal the costs of those improvement works (the Green Deal’s golden rule).
  • Where the landlord has carried out all possible improvement works that would achieve a “payback” in seven years or less, in that the expected savings in energy costs over a seven year period exceed or equal the cost of those works.

Landlords will be required to register any applicable exception, and relevant evidence, on a central register, which will be maintained by the local trading standards authority.

Importantly, the regulations do not apply to lettings of 6 months or less and 99 years or more. Also, should a building not require an EPC, for example because it is listed, the regulations will not apply. However, should an EPC be in place despite one not being needed the regulations will bite.

There is no doubt that EPC’s will be met with much more scrutiny than has previously been the case, given the substantial financial consequences of not complying with the MEE’s. However, an early and proactive approach towards improving ratings would aid in removing the risk of being caught by the regulations.

For more information on EPC regulations and what you need to consider, contact Anna Duffy at anna.duffy@dtmlegal.com

 

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