In September 2014, the UK government closed its consultation on the introduction of minimum energy performance standards ("MEPS") for domestic and nondomestic lettings in the private sector in England and Wales. The proposed MEPS rules are the next logical step in the continued drive to force the property industry to improve the energy efficiency of buildings and so reduce the UK's carbon emissions. Landlords of nondomestic (i.e., commercial) property will be required to take steps to ensure buildings they let achieve the minimum standards to be set.
The consultation document fails to provide the text of the
proposed new regulations that will be introduced under the Energy
Act 2011. That said, it seems clear that actual improvements to the
energy efficiency of the least efficient buildings—that is,
those with an Energy Performance Certificate ("EPC")
rating of "E" or lower—will need to take place
beginning in April 2018. The consultation suggests that, subject to
certain exemptions, this restriction will apply to any new lettings
from that date (the so-called "soft" start date), while
existing lettings will fall within the restrictions from the
"hard" start date of April 1, 2023 (but with an earlier
hard start date of April 1, 2020 for domestic, i.e. residential,
lettings). In essence, action will need to be taken not just prior
to the grant of new lettings but on existing ones in place on those
dates. It is therefore important to consider the risk of letting
"F" and "G" rated premises whose term will
still be running on the hard start dates.
Enforcement of the regime will rest with the local trading
standards offices, as is the case for enforcement of the EPC
regime, but without the certainty that failure to enforce within
the EPC six-month time limit will mean no further action can be
taken. Once a transgression of the rules is established, an
enforcement officer can require a landlord to pay a penalty that
will be subject to a minimum cap and a maximum cap currently
proposed at £5,000 for the domestic market. A different
approach is being considered for the nondomestic sector with the
possibility of a penalty being linked to the level of rent
reserved. In addition, an energy efficiency improvement notice
could be served requiring action within the next six months, with
the risk of further enforcement action for failure to comply.
It is also apparent that the "E" rating trigger will
rise over time to a higher standard, but no clarity is offered in
the consultation as to when this will be or as to the eventual
rating required. That said, an "A" rating for all
buildings by 2050 is discussed. Landlords will now need to pay
greater attention to EPC ratings in view of the penalty and cost
implications.
Landlords may not have to carry out improvement works where to do
so would mean incurring expenditure that would otherwise fail the
UK government's Green Deal funding mechanism's "golden
rule" test (i.e., the total energy savings are outweighed by
the costs) or would result in a net material decrease in the
property's value. A compliance exemption is also offered where
a third-party consent is needed to do the works and that consent is
not forthcoming, "through no fault of the landlord"
despite having used "best endeavors." This in itself is
an onerous test to meet. The suggestion is that any exemption would
be limited to a maximum of five years and then the need for
improvements will have to be reassessed. If a consent was refused
from the occupational tenant itself, then it is proposed that the
exemption will last only until that tenant moves out.
As a further concession, it is proposed that a landlord will not
have to carry out the improvement works if it cannot raise the
up-front costs through the government's Green Deal funding
mechanism or, in the case of domestic property, both under that
initiative and/or under any available grant funding. If it can do
so, then the landlord will have to do the works but will not have
to use either funding mechanism. Wherever a landlord does claim an
exemption, it will need to keep an audit trail of the reasons and
be prepared to produce them to any enforcement officer.
Where a building is let on a shell and core basis, it will be
necessary to ensure that the works are done to ensure build-out
works are undertaken to meet the MEPS. Most typically, this will be
covered by the agreement for lease, and the obligation to do the
works could be placed on the tenant under the agreement, but
ultimately it will be for the landlord to ensure such works are
done. Care should be taken that tenant alterations are not made
during the course of the lease that would alter the EPC rating
below the MEPS. Landlords are already updating their lease
precedents to cover these points as well to address any unintended
consequences on the usual rent review clauses. In particular, care
should be taken in drafting such clauses to militate against the
risk of a tenant taking an unfair advantage on any rent review,
claiming that it should have a discount because a letting of a
property with an EPC asset rating below the permitted MEPS is
unlawful. One can see the argument potentially being raised where
the hypothetical lease assumes a shell and core letting that could
mean a below-MEPS rating at grant, where after the anticipated
build-out (in practice paid for by the landlord) would ensure a
compliant rating.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.