MEES: a recap on the minimum energy efficiency standards

On 01 April 2018, the first phase of the minimum energy efficiency standards took effect. Introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the Regulations), it is now unlawful for a landlord to grant a tenancy of a property with an energy performance certificate (EPC) asset rating of below “E”, without having registered a valid exemption – temporary, third party consent, devaluation. In addition, whilst not referred to an exemption under the Regulations, taking effect as one, where all relevant energy improvements have been made and there are no further relevant energy improvements that can be made.

Importantly, exemptions do not offer permanent reprieve, lasting up to five years (six months in case of the temporary exemption) and the Regulations must be strictly complied with if they are to be relied upon. Landlords must register exemptions on the PRS Exemption Register, and applications must be supported by evidence to show that the relevant exemption can be relied upon: for example that attempts have been unsuccessfully made to obtain third party consent, or in respect of the devaluation exemption a report from an independent surveyor.

The Regulations only apply to lettings, and only where the property being let is required to have an EPC. In circumstances where a property is subject to the Regulations, has a sub-standard asset rating and was let on or after 01 April 2018, the tenancy will still be valid and the tenant will still be liable to pay the rents reserved by the lease. The sting in the tail provided by the Regulations is that, in the absence of a registered exemption, landlords will be liable to financial penalties of up to £150,000 and will be subject to public “naming and shaming” and the associated bad publicity that brings.

Careful consideration of the Regulations will need to be given whether you are a lender, landlord or tenant:

• Whilst financing and re-financing does not trigger the requirement to produce an EPC, lenders ought to be aware of a property’s asset rating to adequately asses its risk profile. The rental and capital value and marketability of a sub-standard property could be materially affected as could the borrower’s revenue stream and subsequent ability to make repayments.

• Landlords must now factor compliance with the Regulations into their due diligence on investment acquisitions, not least because the benefit of exemptions cannot be assigned. Landlords should also ensure that a long term view is taken when planning asset maintenance and improvement programmes with the likelihood of the Regulations introducing more stringent minimum standards in the future in mind.

• The Regulations are directly enforceable against landlords. Tenants however will likely see in-direct effects including greater resistance from landlords to proposed fit out plans where those plans could adversely affect the property’s asset rating, possible business disruption where a landlord has reserved rights to re-enter the property to carry out improvement works and attempts to pass costs of improvements to tenants in the drafting of leases. Tenants could be directly caught in circumstances where they become landlords, for example on the grant of a sub-lease.

Clearly the Regulations give some much needed teeth to EPCs, although it remains to be seen whether they go far enough to assist in the government’s commitment to making significant reductions in greenhouse gas emissions. Much will depend on the availability of exemptions and how strictly the Regulations are enforced by local authorities.