30 May 2018
MEES – What do Landlords and Tenants need to know?
On 01 April 2018, it became unlawful for landlords of private rented property to enter into any new leases (including lease renewals), where that property fails to meet the Minimum Energy Efficiency Standard (MEES).
Further, from 01 April 2023 it will be unlawful to “continue to let” property that falls below the Minimum Energy Efficiency Standards.
Richard Robinson answers 20 of the most frequently asked questions below, explaining how the new legal standard works and how it is likely to impact on both landlords and tenants. He also sets out some practical issues and steps which should be considered.
1) What are Minimum Energy Efficiency Standards?
The Minimum Energy Efficiency Standards, or MEES, regime was introduced by the Government in March 2015. MEES form part of the Government’s package of measures (including the EPC Regulations and the Green Deal) whose aim is to meet the Government’s obligations under the Energy Act 2011, to cut carbon emissions by improving the energy efficiency of both domestic and non-domestic buildings. The advice below focuses on non-domestic buildings.
From 01 April 2018, MEES prevent any new lease from being lawfully granted (including any renewal lease) for property with an EPC rating of F or G.
It is estimated that nearly 31% of non-domestic properties currently have an EPC rating of E, F or G. MEES is a big issue for the property industry.
MEES will only apply to buildings which have a current EPC in place.
2) What are EPCs?
An Energy Performance Certificate (EPC) provides information on the notional energy performance of a building and is rated on a scale between A (best) and G (worst).
An EPC is required on the construction of a new building. The sale or letting of a building or where there is significant alteration to a building. They can be prepared for a whole or a part of a building.
EPCs are valid for ten years unless a new one is obtained before then or there is a significant alteration to the building.
EPC ratings are recorded on a central, publically accessible, register. You can search the register by property address to determine whether a property has an EPC (and its rating if so) using this link: EPC Register
EPCs last for 10 years, although they can be renewed at any time.
3) If my property has an EPC rating of E or higher can I ignore MEES?
No. Most EPC ratings will have diminished over time. A property with an EPC from 2012 at a C rating could now be an F or a G.
Some energy assessors are advising that EPCs which are 5 years old or more cannot be relied upon.
The Government will review MEES regularly (at least every five years) and the minimum E rating may be increased to a higher level.
An EPC assessment, of course, only reflects the position at one day in time. That EPC then lasts for 10 years.
4) Do MEES apply to all property?
MEES will apply to the majority of leased property. However, they do not apply to:
- Buildings which are being sold rather than let;
- Buildings where licences rather than leases are granted;
- Owner-occupied properties;
- Buildings where there is no EPC, or the EPC is over 10 years old;
- Buildings which are not required to have an EPC – for example certain agricultural and industrial sites;
- Tenancies of less than 6 months; and
- Tenancies of over 99 years.
5) Are there are any exemptions?
The regulations provide for a number of specific exemptions from MEES. For example:
- “The Golden Rule” - where the landlord has demonstrated either that all cost effective improvements to the property have been carried out, or alternatively that improvements which could be made would not pay for themselves within seven years through energy savings;
- Where the landlord is unable to obtain the necessary consent of a third party to carry out MEES works – a tenant, a superior landlord, or a local planning authority, for example; or
- Where it can be shown that MEES works would devalue the property by 5% or more.
6) What should I do if I consider I have an exemption?
Strict rules apply to any landlord seeking the benefit of any one of the exemptions. It is likely that landlords are going to require the input of an energy assessor, specialist legal advice, valuer and/or a surveyor in order to confirm and evidence that they qualify under any one of the exemptions.
Any exemption that is claimed must be recorded on a central exemptions register (which can be accessed here). Registering such an exemption may adversely affect the value of the property.
Exemptions last for either six months or five years and therefore have to be kept under review.
7) What could happen if I fail to comply with MEES?
Ultimately, the penalties for non-compliance can be severe. Graduated penalties apply, depending on the length of the letting:
|Renting out a property for fewer than three months, in breach of MEES.||10% of the property’s rateable value, with a minimum penalty of £5,000 and a maximum of £50,000.|
|After three months…||20% of rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.|
Where a property is let in non-compliance of the MEES regulations that lease remains valid and enforceable as between the landlord and tenant.
8) Who is responsible for enforcing MEES?
Local Weights and Measures Authorities (local trading standard departments) will have powers to enforce MEES.
The Local Weights and Measure Authorities will have the ability to serve non-compliance and/or penalty notices on a landlord suspected of non-compliance with MEES. It is important to note that these notices can be served up to either 12 or 18 months after the date of suspected non-compliance. A landlord who has sold their interest in a property could still, therefore, be served with a non-compliance or penalty notice relating to a period of time when they did own the property.
The regime could also prove to be self-policing. Solicitors will not, for example, be able to proceed with any transaction that is in breach of the regulations.
Similarly, property managers and other professionals will need to be alert to any possible non-compliance of the MEES regime and advise their landlord clients accordingly, if they wish to avoid potential professional negligence claims.
9) What happens if I am served with a non-compliance or penalty notice?
A non-compliance notice should give a landlord the opportunity to comply with MEES or to clarify why they have in fact already complied (or are exempt from complying).
If a penalty notice is received there will be opportunities to appeal the notice but specialist advice should be taken straight away so as to mitigate potential risks. Ultimately, the First- Tier Tribunal may hear any appeals.
10) Who will pay for the costs ensuring compliance with MEES?
Landlords should not assume that costs relating to MEES can be passed on to their tenant. In the majority of cases, that will not be the case.
A standard repair, service charge, yielding up and/or statutory compliance clause which has been drafted without MEES in mind is unlikely to entitle a landlord to recover capital expenditure costs related to MEES. Such clauses do not usually cover improvements to the property.
Specialist legal advice should be sought if you consider your lease may allow recovery of costs for MEES improvement works.
There may be some tenants that will welcome green measures and may also be willing perhaps to contribute towards the cost of those. We anticipate, however, that these will be few and far between.
In the vast majority of cases, it will be landlords who need to fund any necessary works. However, if the works preserve or increase the value of the asset and/or reduce liabilities in relation to heating and electricity payments the net result of MEES may not be of neutral or little cost effect.
11) What about gaining access to carry out MEES works?
Existing lease covenants may not be sufficient either for inspection for MEES purposes and/or physically carrying out works, particularly where the latter involves significant disruption to the tenant’s business.
In this scenario there is a specific exemption which can be claimed by the landlord where the necessary consent of a third party to carry out MEES works cannot be obtained.
Leases may therefore need to be updated going forward in order to address potential access and permission issues.
12) Will MEES affect dilapidations claims?
MEES has the potential to affect both interim and terminal dilapidations claims.
If it can be argued that improvement works would have to be carried out at the end of a lease by the landlord in order to comply with MEES and that this work supersedes those works of repair for which the tenant is liable then claims may diminish. There are also valuation matters to take into account that may affect any terminal dilapidations claim.
Conversely, it may be possible in certain specific circumstances to improve the efficiency of a property through a dilapidations claim when certain elements of a property are out of repair.
Shulmans are specialists in dilapidations advisory and litigation work and if you would like to discuss these issues further you should not hesitate to contact one of the team.
13) Should I try and stop my tenant applying for an EPC?
Many landlords will want to see a clause preventing a tenant from applying for an EPC for their property. Consider:-
- If the property currently does not have an EPC, then MEES will not apply (and landlords may want to keep it that way); and
- If there is a current EPC in place, then applying for a new one could well see the rating drop, and substantially in some cases – more below.
14) Can I delay MEES applying to my property?
At this stage MEES only applies to new lettings.
Landlords may therefore wish to prevent any sub-letting of the property where they can, although that will likely be difficult in practice.
Likewise, landlords may look to defer any lease renewals, where possible, until they have their MEES strategy in place.
It may be that for short and otherwise void periods, licences can be granted for suitable occupiers such as pop-up retailers. Specialist legal advice should be taken as to whether a licence arrangement is truly a licence arrangement, however, and does not actually take effect in law as a lease.
Landlords will invariably want to see a clause in leases going forward to prevent their tenant from applying for a new EPC.
15) How might MEES affect property finance?
A poor EPC rating in the post-MEES world will likely affect property values, and therefore loan to value ratios.
There may well come a point, however, where banks and financial institutions are simply not willing to lend on F and G rated properties.
Landlords therefore need to put their mitigation strategies in place now.
16) What about sub-lettings?
These are subject to MEES. If and when a tenant wishes to grant a sub-lease, then it is their responsibility (in addition to the superior landlord/freeholder) to ensure that the property meets MEES requirements before going ahead.
Tenants will therefore need to carefully consider the positon before proceeding with any such transaction.
17) As a Landlord, what other practical steps should I be taking now?
It is clear that landlords will need a clear and detailed MEES strategy in place going forward. As part of that, they might think about issues such as:-
- Having a good energy assessor as part of your professional team. They should be integral to considering, for example, what works can and should be carried out to your property, assisting with any future tenant applications for consent to alter, in terms of how these impact upon the EPC and so on;
- Landlords need to understand what feeds into EPC rating and make informed decisions on the back of that;
- Understanding the current EPC rating for each of their properties;
- Ensuring a comprehensive package of MEES clauses in your leases going forward, to deal with the issues set out here.
18) What can we expect from MEES in the future?
From 01 April 2023 onwards, MEES will be extended to cover all leases, existing and new. It is also very possible that the current minimum E standard will rise in the future.
It is therefore crucial that landlords and the wider property industry get to grips with MEES now.
19) Will all this disappear with Brexit?
This appears unlikely. The UK has committed to reducing carbon emissions through the Energy Act 2011 and one of the obligations of that Act is to implement MEES. There would therefore need to be a repeal of UK law.
20) Where can I get more information?
Shulmans’ Real Estate Team is always happy to provide bespoke legal advice on MEES related issues. Please contact Richard, or any of the team, to discuss in more detail.