The government is committed to combat climate change and to reduce UK emissions and has set key deadlines on landlords to play their part under the minimum energy efficiency standards (MEES).
The energy efficiency of all properties is measured by their energy performance certificate (EPC) rating which range from ‘A’ to ‘G’ with ‘A” being the most energy efficient and ‘G’ the least. MEES has been with us for several years now and has introduced step changes for energy efficiency standards and from 1st April 2023 further changes are due to come into force. From this date landlords of commercial properties will not be able to let, or continue to let, properties with an EPC rating of less than ‘E’, residential properties have been subject to this restriction since 1 April 2020. After 1st April 2023, any commercial property with an EPC rating of ‘F’ or ‘G’ cannot be let unless certain exemptions apply although the leases of any such properties that are let at this date will remain valid and in force but the landlord will be in breach of the MEES regulations and exposed to enforcement action and penalties which can be both financial and publication. Penalties can be levied in respect of each unlawful tenancy so in a multi-let building, financial penalties could very quickly add up.
There are further proposals to tighten the rules regarding emissions from the property sector even further by reducing the minimum standard a property must reach to be let to a ‘C’ rating from 2025 with the government wanting all properties to reach a ‘C’ rating by 2035 but looking closer ahead the changes due next year are likely to concern both landlords and tenants of both commercial and residential properties. Landlords will either need to register one of the limited exemptions, which are set out below, or upgrade their properties to comply. For larger landlords who have the resources to upgrade properties the changes may be less of a concern but for smaller landlords it is foreseeable that many will sell up and this will have an inevitable effect on the property value if it is not compliant. The UK has some of the oldest housing stock globally and this weekend’s FT quoted that only 42% of assessed housing in England currently reaches a ‘C’ rating and that a third of private rented homes were built before 1919 rendering them more difficult to upgrade so in summary there is a lot of work to be done if the 2025 deadline is to be achieved in the residential sector. This will also impact the commercial rented sector and the knock-on effect could make the squeeze on finding property to rent at a sensible price even more difficult for tenants.
What should I be doing?
So, as a commercial or residential landlord what should you be doing to prepare? The first step is to audit your portfolio and identify any property with an EPC rating less than ‘E’ and then to see what, if any, exemptions are available.
What exemptions can I apply for?
The key exemptions available to both residential and commercial landlords are set out below and to benefit from them landlords must register them on the PRS Exemptions Register before they can rely on them:
Long leases – leases more than 99 years
Short leases – leases less than 6 months (where there is no previous continuous period of occupation exceeding 12 months and no right to renew)
Wall insulation exemption - certain wall insulation systems may not be suitable in certain situations, even where they have been recommended for a property, and where they meet the funding requirements which are different for domestic and non-domestic properties
Lack of consent – the landlord cannot obtain any necessary third-party consent to undertake necessary energy improvement works (e.g. planning, tenant consent to works)
Devaluation – improvements will reduce the market value of the property by more than 5% (to be supported by expert valuation evidence)
New landlord – on purchasing a non-compliant property which is let to tenants, the new landlord has a 6 month ‘grace period’ from the date of purchase to bring the property up to at least an E EPC rating.
All improvements made – all relevant energy improvement works have been carried out (or there are none that can be carried out) and the EPC remains below an E
In addition to the above, the key exemptions only available to commercial landlords are:-
And those only available to residential landlords are:-
What do I need to look for in the lease?
For commercial landlords the next step is to review your lease to see if it permits you as landlord to undertake improvement works or if you can recover these from the tenant via the service charge. There has been much debate on who pays for MEES related improvements with landlords raising the point that a tenant is liable for these changes under its obligation to comply with statute although after years of similar arguments it is generally accepted in lease negotiation that MEES compliance falls on landlords. Most leases now include provision that the landlord will provide, and pay for, the initial EPC and obligations on the tenant prohibiting their applying for an EPC without landlord’s consent and not to carry out any works that decrease the rating. This gives the landlord control over the EPC and the tenant certainty over who is doing what and it is worth choosing your EPC assessor carefully as a good one could mean the difference between your property achieving an ‘E’ and being able to be let and an ‘F’ and it not being lettable.
There is no sign that the government will change its stance on improving energy efficiency and reducing carbon emissions and with the fast-approaching 1 April 2023 deadline it is vital that you ensure your portfolio is compliant before the deadline. The property sector must play its part in reducing emissions and it is becoming more and more important that all new leases contain ‘green’ provisions to ensure that both landlords and tenants are aware of their responsibilities and for who pays for what from the outset.
If you have any questions relating to the above points, please contact Aileen Houghton on firstname.lastname@example.org.