Will new Minimum Energy Efficiency Standards (MEES) affect the balance between Landlords and Tenants?
By Jamie Chamberlain, Business Development Manager
The general rule, is that landlords will not be able to let a property with an Energy Performance Certificate (EPC) rating of F or less with effect from 1st April 2018.
The Minimum Energy Efficiency Standards (MEES), introduced in 2011, start to come in to force in April 2018. From 1st April 2018, private landlords must ensure that commercial properties they rent in England and Wales reach at least an EPC rating of E before granting a tenancy to new, or existing tenants. On 1st April 2020, these conditions are extended for all existing tenancies and on 1st April 2023, to all non-domestic property leases.
If commercial property becomes un-lettable, there will be a significant impact on the relationship between landlords and tenants, and may make it less attractive for both investors and lenders alike.
The background
The Government’s reasoning is that they want to reduce carbon dioxide emissions that have been linked to climate change. With over 20% of commercial property in England & Wales expected to fall foul of MEES, it is an area in which much progress can be made towards our commitment to improve energy efficiency and reduce carbon emissions.
Landlords who wish to continue letting substandard property will need to ensure that the EPC rating is raised to a minimum of E. Prior to letting, they will be legally required to upgrade that property, by implementing cost effective Relevant Energy Efficiency Improvements (REEI). There will be exemptions, many on a temporary basis to allow the landlord time for the work to be done.
Which areas will be impacted?
Rent reviews, lease renewals, lettings and valuations and mortgages could be significantly impacted.
There are clear implications for lease renewals. Firstly, landlords may not refuse consent to the lease renewal on the basis that a property is sub-standard. Secondly, tenants may not use a landlord’s failure to comply with the minimum energy efficiency standards as a reason to prematurely terminate their lease.
After April 1, 2018 where a tenancy is renewed or extended, or a new tenancy is granted, at a property with an EPC of F or G, the landlord will be obliged to either improve the property (to at least an E), or register any applicable exemption. Landlords may be eligible for a temporary, six-month exemption where a new lease is granted at a sub-standard property in accordance with the Landlord and Tenant Act 1954.
A drop in the property’s value is also likely. Only time will tell whether this will significantly affect the property’s suitability as a lendable asset and additionally, if some commercial buy to let landlords will take advantage of a reduction in value to pick up cheap stock.
Potential areas of disagreement
There will be cases where tenants have made improvements during their tenancy which have resulted in the property achieving MEES compliance.
Any improvements relating to MEES compliance, are the responsibility of the landlord. If, by disregarding energy efficiency improvements carried out by the tenant, the property in question would become uncompliant with MEES, a dispute could arise as it could in theory become un-lettable. These disputes are most likely to stem from a tenant’s right to request consent to energy efficiency improvements – which was introduced on 1st April 2016.
It has been estimated that nearly 20% of all commercial properties in England and Wales may not fully comply with MEES regulations. When commercial leases enter the negotiation phase for potential renewals, this could have an impact on the rental valuation and returns for landlords and investors. Some in the commercial property sector believe MEES may have as much as a 10% impact on the cost of commercial lease renewals.
Similarly, the assumptions made during a rent review over hypothetical letting, should a property reach the required EPC, are an issue set for negotiation and potentially a requirement for arbitration.
How can Anderson Wilde and Harris help?
Anderson Wilde and Harris are RICS registered Chartered Surveyors with long-standing expertise in Landlord and Tenant negotiations and commercial property consultancy across London and the Home Counties. Much of our work in this sector is in the position of an expert witness. If you are landlord or a tenant of a commercial property or just have some questions about the topics discussed in this article, please get in touch.
Jamie Chamberlain,
Business Development Manager