20 March 2017

The latest "MEESage" for landlords

The Department for Business, Energy and Industrial Strategy has published much awaited guidance on minimum energy efficiency standards (MEES) for non-domestic property.

The guidance is not legally binding and that for domestic property is set to follow. This isn't the place for a detailed analysis of its content or its shortcomings. Instead, we update on where things now stand, and provide some key "take-home" points for landlords in non-domestic property.

Key points

  • Guidance is now available on how minimum energy efficiency standards will apply to non-domestic property
  • The guidance is a reminder that the first restrictions on letting will apply in just over a year (April 2018)
  • Next month, landlords have the opportunity to register exemptions up-front- but perhaps the exemption process is best avoided?

The MEES myth

The guidance is a reminder that regulations for MEES are already law and set to remain (despite BREXIT inspired rumour to the contrary). The first MEES deadline is in just over a year, when a restriction on granting or renewing a lease of F or G EPC rated property will bite (April 2018). Time to prepare is short.

MEES and EPCs

The MEES restrictions apply to non-domestic property that "legally requires" an EPC. However, the restrictions can only bite if a valid EPC is in place. A failure to obtain an EPC is unlawful and gives rise to potential financial penalties (£500-£5,000 dependent on the rateable value of the building). The potential MEES financial penalties are more substantial (up to a maximum of £150,000). The guidance does leave open the question of what happens if an EPC is not put in place as required, when the building may otherwise fall foul of MEES. With greater financial penalties involved, are we set for more stringent policing of EPC provision? There is no doubt that with additional MEES risk, the decision for landlords on whether an EPC is "legally required" in the first place is not one to take lightly (the guidance emphasises the need for expert advice). Furthermore, it is not only the enforcement authorities but also incoming purchasers that will be asking questions.

Helpfully, the guidance suggests that if an EPC has been put place (albeit strictly not required), the MEES restrictions will not apply. Nonetheless, for an incoming purchaser, this does present interesting questions e.g. does the building legally require an EPC/ when was the EPC put in place and was it then required?

Relevant energy efficiency improvements (REEI)

5 year exemptions are available. These are based on REEI. These are, in summary, improvements that provide a 7-year payback (the expected value of energy bill savings exceeds the cost of carrying them out). A landlord must demonstrate that there are no REEI or if there are REEI, carry them out. There is an exemption if the landlord cannot obtain consent to carry out works (tenant, planning permission etc). However, affordability is not an excuse.

Exemptions

Our view is that, if possible, the exemption process is best avoided. Why? As above, one exemption is available if a tenant refuses consent to works (on the basis of its lease). The landlord must use "reasonable efforts" to obtain consent, retain evidence of its efforts and to benefit from the exemption, register this. In addition, the lack of consent must apply to each REEI (a tenant may approve some REEI, not others). Whilst the guidance adds a little detail on what steps/ evidence is expected, it's not clear cut.

Furthermore, a landlord cannot simply sit back and rely on the exemption for five years. It must ensure the exemption remains up to date. For example, with costs changing, improvement work may become an REEI. A tenant previously refusing consent may vacate/ change its mind. It's all quite burdensome, and not a process that a purchaser will want to repeat (see below). If, nonetheless, a landlord is likely to require an exemption, the opportunity to register in advance of of 2018 opens up next month (April 2017).

Change of ownership

The guidance stresses that exemptions are not transferable to a purchaser. There's a six-month temporary exemption available for a new purchaser, but to take the benefit, this also requires registration. If exemptions are in place, a purchaser will no doubt drill down in due diligence on the basis for exemptions. It's all the more reason, if possible, to eliminate MEES risk up front and avoid the need to rely on exemptions (e.g. bringing a property up to scratch now, possibly involving collaboration with sitting tenants, as this UK-GBC publication suggests).

Ongoing liability

Liability for non-compliance will not transfer on a change in ownership. If it hasn't complied, a seller is at risk of financial penalty after it has sold (there's a 12-month window available for the enforcement authorities to serve a "compliance notice", in the event of suspected breach). Again, the guidance emphasises the importance of retaining evidence of compliance.

Listed Buildings

The guidance provides much awaited clarification. Listed buildings are not automatically exempt from the requirement for an EPC and therefore MEES. It's all dependent on whether compliance with minimum energy requirements "would unacceptably alter its character or appearance". It's not exactly definitive, and again, the guidance emphasises the need for expert advice.

Future trajectory of MEES

The guidance acknowledges that the methodology for calculating EPC ratings is periodically updated. Therefore, the existing EPC rating may not reflect the current position. If an EPC is nearing the end of its 10-year lifespan, a new EPC now may well register a depressed rating. Incoming purchasers will continue to interrogate the accuracy, and in particular, the age of subsisting EPCs (here's a helpful blog on EPC due diligence). This stringency with which EPCs are prepared will no doubt continue to increase. In addition, the government has made it clear that the minimum threshold (E) at which MEES obligations apply will rise. However, the guidance does not indicate when and how. The lack of certainty is not helpful but for any landlord, it is perhaps sensible to "future proof" as far as possible now if the opportunity allows.

"Forsters had already hugely increased in size and turnover in the last ten years, and this move has really added to that"  on the arrival of the private client team from Gowling WLG.
Chambers HNW Guide 2017
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