The rules surrounding energy efficiency and minimum standards for landlords are changing very soon. Our recent article considered the residential property changes, what they mean and implications for non-compliance of the rules.
If you are a landlord of a commercial property, you need to be aware of your obligation to comply with these regulations and think about how to protect your position now before the full changes are implemented.
A recap on the rules
As it stands, commercial buildings have energy efficiency ratings that go from A to G. F and G are the worst performing.
In 2015, the government introduced new legislation (known as the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015) to bring in a new minimum energy efficiency standard (“MEES”). The new law introduces a minimum standard of E.
What does this mean for commercial landlords?
From April 2018 it will be unlawful to grant a new lease of a commercial property with an energy rating below an E. This also includes tenancy renewals.
Then, from April 2023, landlords must not continue to let any property with an EPC rating of less than E, unless the landlord has registered an exemption. This means that commercial landlords will have to undertake work to improve the efficiency on all properties with a rating below an E.
Landlords will need to take action now in order to avoid huge repair bills in several years to come.
What sort of properties are affected?
In terms of commercial properties, most will be within the scope of MEES. However, it will not apply in some cases including:
- Buildings that are not required to have an EPC
- Tenancies of less than 6 months (with no right to renew)
- Tenancies of over 99 years.
As with residential buildings, the regulations only require landlords make appropriate, permissible and cost-effective improvements. Landlords will be eligible for an exemption from reaching the MEES where they can provide evidence that they qualify. Some of the exemptions are that:
- The landlord has carried out cost-effective improvements, but the rating remains below an E. Or where an independent assessor determines that any improvements that could be made would not pay for themselves through energy savings within seven years.
- The landlord requires consent, but the occupying tenant or superior landlord withholds that consent.
- A suitably qualified, independent surveyor confirms that carrying out the improvements would cause the property value to decrease by over 5%. Any measures that are expected to cause such devaluation would be exempt.
Landlords need to register all exemptions in a national register. Failure to register the exemption will render it ineffective, and will amount to non-compliance with the regulations.
Exemptions will last for five years. After this time, landlords will need to review to see if they are still effective. You will not be able to transfer an exemption to a new landlord.
There will be financial penalties for failing to comply with the Regulations. The penalties vary depending on how long the landlord has been renting out the property in breach of the MEES Regulations, and increase with the rateable value of the property:
- For up to three months: 10% of the property’s rateable value. (This is subject to a minimum penalty of £5,000 and maximum of £20,000).
- For three months or over: 20% of the property’s rateable value. (This is subject to a minimum penalty of £10,000 and maximum of £150,000).
It is important to note that breaches of the MEES regulations do not affect the validity of the lease.
What should landlords do now and how can we help?
For many landlords, carrying out works to upgrade non-compliant buildings will be costly. Further, there is a risk of a potential loss of income if a property cannot be rented out. It is important therefore that landlords are prepared for the changes in advance. You can start preparing now in a number of ways such as:
- looking at your portfolio to consider which properties are within the scope of MEES. Do any exemptions apply?
- Carrying out assessments to check the EPC rating of your properties
We can help by carrying out a comprehensive review of your leases. We will look at matters such as:
- how your lease term and renewal dates fit in with the MEES schedule;
- access provisions;
- provisions regarding carrying out improvements; and
- service charge provisions and rent review clauses.
Where you are looking to enter into a new lease, we will advise you on how to best protect your position. Each landlord and tenant situation is distinct and we will take your requirements into consideration. Our specialist commercial property team can advise you. Call us today on 0800 988 7756.