New Energy Efficiency Rules – the Implications for Commercial Landlords
At the beginning of 2018, the Minimum Energy Efficiency Standard (MEES) will start to ‘bite’ commercial buildings. It is important, however, for landlords of such properties to get ready for the MEES now.
The implementation of the new rules is taking place, effectively, in two phases.
What are the essential points?
Many of us are now familiar with the concept of energy performance certificates (EPCs) , which give energy-related ratings for properties in the form of a graphic similar to those appearing on white goods, such as washing machines and fridge freezers, resembling something along the lines of the image shown below.
From 1 April 2018, any newly let property that is found to have a rating of ‘F’ or ‘G’ will not meet the MEES. A financial penalty regime, enforced by the local authority, will apply to such properties.
It will be important for landlords to consider the recommendation reports attached to their EPCs to see what work can be carried out to improve any adverse ratings, bearing it in mind that it is likely the minimum standard (an ‘E’ rating from April 2018) will rise, over time.
The revised regime will apply to new lettings from and including 1 April 2018, including lease renewals where an EPC already exists.
Existing lettings will not be affected until 1 April 2023 but only if the property has a valid EPC.
Given the high frequency of commercial properties that are, due to market conditions, let for relatively short terms (e.g. 3 to 6 years), this means that the majority of lettings are likely to be affected by the above changes by the early 2020s.
There are some exemptions from the MEES but these will apply in quite remote circumstances and none of them will last indefinitely.
Local weights and measures authorities will have a range of powers to enforce the new regulations. They can:
- Serve notices asking for information/copies of relevant documents
- Issue penalty notices and fines (which could be as high as £150,000 if the breach of the regulations (however minor) has been left ignored for more than three months!)
Recommended action
Landlords of commercial buildings with substandard EPCs should be considering how to improve their energy efficiency ratings now. Failing to do so will probably mean that (i) such properties cannot be let in the future; and/or (ii) banks and other lenders will refuse loans/mortgages secured against such properties. This, in turn, will have a potentially disastrous impact on income and investment values.
New lettings
Depending on the circumstances and the overall bargaining strength of the landlord, it might be sensible to consider negotiating the following in the context of agreed, new lettings:
- An obligation, on the part of the tenant, to make certain improvements to the property (e.g. the replacement of the heating system)
- A reserved right, in favour of the landlord, to have access to the property, during the lease term, to carry out energy efficiency improvement works
- An indemnity by the tenant, in favour of the landlord, against any energy improvement costs
This will allow the landlord to ensure that the EPC rating is appropriately upgraded.
Agents/surveyors agreeing heads of terms, on behalf of their landlord clients, should take the above into account.
The author: John Appleby
