A reminder that from 1 April 2018, commercial property landlords granting new leases of energy inefficient properties could be liable for hefty fines of up to £150,000.
The new regulations will prohibit the letting of properties which do not meet the prescribed minimum energy efficiency standards (MEES). After 1 April, it will be unlawful to grant a new lease (including a sublease and lease renewal) of commercial property with an EPC rating below an “E”.
It is reported that there are still thousands of commercially rented properties in the UK which are rated “F” or “G”. The rules require landlords to upgrade such energy inefficient properties before being able to rent them out on new tenancies. These ratings may be raised in the future so it might become unlawful to let grade E properties too, or the grade thresholds themselves may be raised.
There are some exemptions that will enable a landlord to let, or continue to let, a substandard property including:
- Properties that are exempt from the EPC Regulations (e.g. certain listed buildings and buildings that are temporary or due to be demolished) are also exempt from MEES;
- The seven-year payback test – where the capital cost of the required measures is not cost-effective within a seven year payback period;
- Third party consent – where necessary third party consents cannot be obtained despite reasonable effort;
- Property devaluation – where the proposed measures would reduce the value of the property by 5% or more;
- Recently becoming a landlord – where the owner has recently become the landlord (which allows a temporary six-month exemption in limited circumstances).
The landlord must register its exemption on a central online register. If the landlord sells the property, the new owner must apply for a fresh exemption.
Effect on lease
If a landlord lets, or continues to let a property in breach of the regulations, the lease will still be valid but the landlord could be liable for significant fines, linked to the rateable value of the property and up to £150,000 for a commercial property landlord. In addition, the landlord’s breach could be subject to a publication penalty, designed to publically shame them.
MEES will apply to existing leases from 1 April 2023
From 1 April 2023, MEES will be extended to apply to all existing commercial leases so it will be unlawful to continue to let properties with an F or G rating unless an exemption applies and has been validly registered. This means that a lease that was legal when granted could become unlawful in April 2023.
Wider impact of the MEES Regulations
MEES may have implications for rent reviews, lease breaks, dilapidations and property management. It will also be interesting to see how the market reacts and what the wider impact will be on property and property funding generally.
It remains to be seen how strictly the regulations are enforced and, in that context, whether they help achieve the government’s aim of reducing greenhouse gas emissions in buildings.
This is not legal advice; it is intended to provide information of general interest about current legal issues.