12 December 2017

Investment in residential or mixed use property- is it “MEES” you’re looking for?

The publication in October of guidance on minimum energy efficiency standards ("MEES") in domestic rented property is a reminder that MEES applies across the spectrum of commercial, residential and mixed use assets.

From 1 April 2018, a landlord cannot let domestic property which falls below the minimum standard (currently, the minimum is an E rating). From 1 April 2020, a landlord cannot continue to let a domestic property that falls below that standard. In either case, the landlord can remedy the situation by either undertaking energy efficiency improvements or applying for an exemption.

In this blog, we focus on considerations now for an investor contemplating a sale or acquisition of a residential or mixed use (commercial/ residential) asset. Are EPCs and/ or MEES a consideration?

1. Are EPCs required?

MEES only applies if an EPC is legally required. If not already in place, the sale of an asset will trigger the need for an EPC in respect of all those parts that legally require it. For a purchaser acquiring a residential/ mixed-use investment, EPCs are almost certainly relevant. The sale or letting of individual units (e.g. sale of a flat/ grant of an AST) triggers the requirement for an EPC. Now that EPC legislation has been in place for almost a decade, it is almost inevitable that EPCs are already in place.

2. Are all necessary EPCs in place?

Broadly speaking, self-contained units in a building each require their own EPC (“being a part of a building which has been designed or altered to be used separately”). Let’s take the example of a mixed use development with a commercial unit on the ground floor and residential units, with separate access, above. Each unit requires its own EPC. On sale, the owner cannot rely on an EPC of the whole envelope of the building.

On acquisition, a purchaser will look to see that the seller has made all necessary EPCs available, and with MEES deadlines approaching, carefully consider the rating of each. The non-domestic regulations will be relevant to the commercial unit, the domestic regulations for the residential.

3. What about units sharing facilities?

There is no legal obligation to obtain an EPC on the letting of an individual unit within a property which is not self-contained. Examples of this would include a bedsit, a room in student accommodation or a room in a house in multiple occupation;  essentially where there are common/shared facilities (kitchen, bathroom etc.)[1]. As above, MEES only applies to domestic rented properties that legally require an EPC. However, the sale of the whole building will trigger the requirement for an EPC. The recent guidance clarifies that MEES then becomes relevant.

Let’s take the example of a student house, containing separate bedsits each let on individual tenancy agreements, but where facilities are shared. Once the house as a whole has an EPC, MEES will “bite” on a new letting in 2018/ an existing letting in 2020. The separate units might not legally require separate EPCs in order to let, but that is not to say MEES does not apply to the letting. If the EPC for the building registers as F or G, MEES will "bite" on any letting within it, even if it is just a letting of a room (subject to below).  

4. Does MEES apply to all types of domestic tenancy?

No. MEES only applies to a "relevant" tenancy. This includes the assured shorthold tenancy ("AST") that investors will most commonly encounter. The grant of an AST legally requires an EPC and now that this requirement has been in place for a decade, a purchaser will expect to see an EPC in respect of any AST of a unit within the building. From 1 April 2018, MEES will apply to the grant, renewal or extension of any AST. From 1 April 2020, MEES will apply to any subsisting AST. As above, a purchaser of a multi-let residential building will need to ensure all EPCs are in place and note the rating of each. The buyer, and its lender, will want to be forewarned of any units that may present a MEES concern.  

The Deregulation Act 2015 is all the more reason for a purchaser to ensure that EPCs are in place. Since October 2015, the Act has obliged landlords to provide assured shorthold tenants with an EPC. If a landlord fails to do so, the landlord cannot then seek to evict the tenant using a section 21 notice (the "no fault" eviction procedure) and regain possession.

5. What about licences to occupy?

The MEES regulations don't apply to licences. However, any incoming purchaser will need to ensure that a "licence" is a permissive right for a licensee to do something on a property, rather than a tenancy granting "exclusive possession".  It is the substance of the arrangement, rather than the form of document, that requires consideration. A seller may disclose a "licence", but again, that is not to say MEES does not apply to that arrangement. If a licence of domestic property, does the arrangement meet the AST criteria? 

6. Student accommodation – is it any different?

In summary, no. Fundamentally, as a consequence of the points mentioned at paragraph 3 above, the applicability of MEES will come down to the nature of the tenancy. If student lets are ASTs, MEES will apply. It is worth noting that student lettings by certain landlords, mainly educational institutions, cannot be assured tenancies[2] which means that MEES is not relevant. However, for private investors or management companies granting ASTs, MEES is a consideration.

7. What about the future?

There is no doubt that for both domestic and non-domestic property, the minimum standards will tighten. In particular, the government's recent publication "The Clean Growth Strategy: Leading the way to a low carbon future" emphasises this. Here are a couple of key points to take away:

  • In respect of commercial and industrial buildings, the government is due to consult in 2018 on "how best to improve the energy performance of these buildings through tighter minimum standards". We suspect the government will look at the stringency of building regulations. Separately, as part of the MEES regulations, it must consider the effect of these every five years, where in all likelihood, the minimum standard of an E is set to increase
  • For domestic property, the government aim is to have "as many private rented homes as possible being upgraded to EPC Band C by 2030, where practical, cost-effective and affordable". It is inevitable that the standard is set to rise. Perhaps more alarmingly, with 2018 approaching so fast, the government is due to consult "shortly on steps to make these regulations more effective"

Edward is an associate in our Commercial Real Estate team.

[1] The Residential Landlord’s Association have made guidance available here

[2] Paragraph 8, Schedule 1, HA 1988/ Assured and Protected Tenancies (Lettings to Students) Regulations 1998 (SI 1998/1967).

Our Insights

"They are very pragmatic and give you advice that you can implement."  
Chambers UK