For many years now, EPCs have been the norm for property sales and lettings. Standing for Energy Performance Certificates they are a form of ‘MOT’ and check of a property interest from a green perspective.
So after lots of information of how energy-efficient the property is, they receive a grade from A to G as to how green the property is. The focus is to enable any new owner or tenant to have this information to hand and encourage works and measures to improve the performance of the property over time.
It’s only been a matter of time though before the government gets serious about insisting that property owners and tenants actually do these works, with one particular measure having the ability to cause real problems. It’s emerged from the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 and known as the Minimum Energy Efficiency Standards as abbreviated to MEES, with further regulations on the practical application beginning to emerge before changes begin in 2018.
In short, the poor properties with ratings below E won’t legally be able to be let, meaning someone needs to complete energy-efficient measures at the property to get it out of the F and G range and passable. As above, it’s kind of like an MOT for a car, and needing a basic level of compliance before you can legally use.
It’s going to apply in two main phases, firstly from April 2018 for all new lettings and lease renewals, and secondly for current leases in place at that time from April 2023 for commercial property and 2020 for residential property.
The bad news is that this obligation includes both commercial and residential properties, but the good news is that it is only for lettings and not sales. In reality though it’s going to affect a notable volume of properties from 2018 causing potential halts to lettings and drops in values as more generally-poorer quality properties are forced to get with the greener times we now live in to reduce the UK’s CO2 emissions.
Opportunities For Exempt Properties
Offering some ray of hope, some properties and situations will be exempt from this requirement.
Automatic cases will be where leases are less than 6 months long or over 99 years long, and where no EPC is legally needed. Check out exempt EPC properties here, although look out for listed buildings still being caught under MEES.
Other discretionary situations will be based upon a self-certification basis, where people need to apply for their own property and interest to be exempt. There is a tight time scale though with applications between April 2017 and April 2018 before any MEES takes effect in 2018, and fines and penalties taking effect. The grounds for arguing these discretionary exemptions are:
· Passing a 7-year payback test, where the cost of any works to complimentary works doesn’t pay for themselves with savings over a 7 year period
· Any consent for, say, alterations from third parties is not possible after reasonable endeavors
· The property value will fall by more than 5%
· A 6-month period of relief is granted before taking effect for both new landlords and those renewing a lease
7 Practical MEES Pointers
There is lot of legal advice already on how this will take effect, as we’re dealing with interpretation of legislation and leases. As the plot unfolds, then there will also be more regulations and guidance in due course, and case law helping to clarify any grey areas.
From a more property management perspective, here are 7 particular aspects to bear in mind, whether you’re a landlord, tenant, or other property interest and advisor:
1. Get Your Exemption Application in Fast
The automatic exceptions above will happen automatically, whereas any of the discretionary ones will need a formal registration.
The time frame is limited, so best to get this in early and not forgetting that any lease renewals will fall within this MEES obligations in addition to new lettings.
2. Check if Your EPC Means MEES Compliance
Copies of EPCs can be difficult to locate. Ideally they should be instructed by the client or agent at the outset, funding arranged, inspections completed, and then final copies circulated to all parties afterwards in addition to the main database. However, Solicitors and others can be tumbling around as a deal goes through trying to locate a copy of these for the record.
When you do find one, check if this was required or not. It may be that the property is exempt, but for some reason someone instructed one either by mistake or just good practice. If that’s the case, then you may not need to comply with MEES as it is only applicable for situations where EPCs are required.
3. Check if a New EPC is Worthwhile
This is where things can get interesting. Once a legitimate EPC has been completed, they’re valid for 10 years unless there have been any notable alterations.
However, parties may decide to deliberately instruct a more current one because of these then determining whether the new one falls in or out of the MEES trigger level of grade E.
Sometimes this may be for genuine reasons of wanting an accurate picture of the property, other times as a tactic to force another party to take action or be able to agree more beneficial terms for a new lease or renewal.
Of course you can’t be certain of the outcome, but there is a risk that the EPC will have a worse rating and therefore suddenly come under MEES if borderline on the basis of increased technology and tighter building regulations over time causing tougher criteria to meet, and often worse-case default settings being assumed where insufficient data or areas covered when it was first completed.
4. Maybe Sell Rather Than Let
Thinking outside the box, this responsibility is triggered by leases and lettings, so if you have a problem-property maybe a sale is worthwhile rather than letting.
For an owner, it may be worth looking at an easier exit, and for an occupier an advantage in becoming an owner-occupier yourself.
5. Work Out What Practical Works are Needed
If your property is caught under MEES, then the bottom line is that you will need to carry out works to the property in order to make it more energy efficient and so improve the EPC rating. It’s all about using less energy within the premises, and less waste and CO2 emission being released.
Some of these might involve the main building structure and fabric, including cavity wall insulation, new windows or secondary glazing, re-sealing floors and gaps, or new insulation in floors and ceilings,
Others can be more on the services side, from renewable energy sources, insulated pipes, better managed heating and cooling systems, and improved lighting and bulbs with sensors and timers.
Not only make sure you have the right qualified person providing you with the reality and not just standard answers which cost money, but make sure you have some common sense applied. So a lot of small easy-wins could be enough to improve the EPC without one larger cost of, say, a whole new heating system or better-insulated roof.
6. Dealing With Lease Renewals, Re-instatement, and Dilapidations
It may sound nice and easy to set a new tenant up, but trying to resolve how things end through an old lease can later bring to light a lot of issues and habits. Even if you’re only dealing with new lettings at the moment, getting a well-documented tenant in there now can clarify the MEES obligations later on at the end of the lease.
An existing tenant will understandably want to mitigate any obligations to re-instate the premises back to any current condition that is ‘compliant’ and means MEES works. So any dilapidations liability and yield-up provision needs careful consideration.
Taking things a step further and the earlier point of deliberately generating a new EPC, a tenant may also instruct a new EPC in the hope that the premises will be declared unlettable in an un-MEES condition and so limit their end’s dilapidations liability. You’re into complicated territory here, and for larger-value commercial properties this can mean big costs.
On the lease renewal side of things, you have the Landlord & Tenant Act 1954 governing commercial property lease renewals. Taking the example of a commercial tenant again then although they may just continue under a new lease then the terms of this and rent can be determined from the state it’s assumed to be in.
So if any original tenant fit out works brought the property just into an E-grade, then if you ignore these at this point and it goes back into a below-E state then you have a MEES obligations. A tenant may be able to negotiate a better rent or incentives like a rent free period on the back of this, and although a landlord will have a 6 months gap in the new lease to complete works then something must be agreed for someone to actually do works within the new leases period in order to comply.
7. The Effect on Rents & Values
Values will undoubtedly be hit, with poorer non-compliant properties having values reduced on the back of perceived costs and risk of making them lettable. It’s like the car analogy of a car having less value with no current MOT in place.
Rents will also be affected, including at rent review times. With commercial property rent review clauses you often must assume a ‘hypothetical lease’ and assumed circumstances, so whether or not you assume the reality of non-compliant MEES property is open to debate.
8. Covering Costs Directly & Through the Service Charges
Someone must fork out for the bill on any works to the property to increase the EPC rating and MEES obligations, therefore check carefully who this is through the lease and any background legislation.
So although with residential property it will tend to be more the landlord, with commercial properties it tends to end up being the tenant either directly or through a service charge for shared areas.
The exact wording of leases may help here, both in new lettings but also existing ones, and what can pass through along the lines of compliance with new legislation, and if any works are arguably beginning to improve the property.
The Meaning of MEES
For those with both residential and commercial properties in the lettings game, then the heat is on to make sure you have a green and eco-friendly property at hand. No more just leaving EPCS in the filing cabinet as simply a paper-exercise to complete a letting – the government wants to see action which may cost people big bucks.
To some degree, everyone will be affected by this, so even though your immediate landlord and tenant may appear to be responsible for this directly instead of yourself or your client, watch out for further consequences to still affect everyone. Therefore face the music now and look into it, even if it does mean holding tight and not getting carried out away with expensive works or even another EPC straight away.