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EPCs and MEES: what you need to know

August 2019

The MEES regulations prohibit the grant of any new leases of buildings with an energy efficiency rating as shown on an EPC of below an E.

So how did we get here? The background

In 2017, 19% of the UK's carbon emissions came from buildings, with residential properties accounting for 77% of these emissions, commercial buildings 14% and public buildings 10%.  Whilst emissions have fallen by 43% as compared to levels in 1990, as a nation we are still a long way from achieving the government's recently announced target of reducing carbon emissions to zero by 2050[1].

In 2002 the EU introduced regulations designed to improve the energy efficiency of buildings which contained a requirement to introduced 'Energy Performance Certificates' (EPCs) designed to show information about the energy efficiency of a building to which it relates.  The EU regulations were implemented in England and Wales via a series of statutory instruments, ultimately leading to the current, EPC Regulations[2].  The story does not stop there though.  The EPC Regulations in and of themselves do not really have any 'teeth' and as such following a number of consultations the Government made the MEES Regulations [3] thus introducing the concept of minimum energy efficiency standards (MEES) for both residential and commercial property.

What are the 'rules' for EPCs and MEES?

The EPC regulations require that an EPC is provided:

  • Where an existing building is to be sold or rented out (which includes the assignment of an existing lease);
  • Following the construction of new buildings; and
  • When certain refurbishment works are undertaken.

The MEES regulations prohibit landlords from granting any new leases of buildings with an energy efficiency rating as shown on an EPC of below an E so called 'sub-standard' properties unless the transaction is excepted from the regulations or an exemption applies and that exemption has been registered.   The prohibition on granting leases of sub-standard properties also applies to renewal leases and extensions of existing tenancies. 

It is also important to note that there are two further key implementation dates in respect of MEES and as such from 1 April 2020, residential landlords must not continue to let sub-standard domestic property, even to existing tenants.  A similar prohibition in respect of commercial lettings comes into force on 1 April 2023 meaning it will be against the law to continue to let commercial properties with an EPC rating of F or G.  In each case, continued letting of sub-standard property may be permissible if an exemption applies.

Furthermore, whilst currently only properties with energy efficiency ratings of below E are categorised as 'sub-standard' the view amongst industry experts is that to ensure that the Government meets its carbon-reduction aims the minimum standard will be increased incrementally thus meaning that more properties will fall below the minimum threshold for energy efficiency.  As such merely because a property has an energy efficiency rating of E does not mean that it might not be designated as sub-standard in the future. 

At what stage is an EPC required?

The EPC regulations impose the following obligations where there is a sale or letting of a property:

  • To commission an EPC before marketing (if here is not already one for the property);
  • To include the EPC rating in any advertisements for sale or letting;
  • To make a copy of a valid EPC available, free of charge, to any prospective purchaser or tenant.  The EPC is to be provided on the earlier of:
    • The point at which written information is first made available to someone has requested such information about the property for the purpose of deciding whether to buy or rent it;
    • The time at which a person views the property following a request to do so.
    • Otherwise at the earliest opportunity.

If these obligations are not complied with an EPC must still be provided even if it is after completion. Furthermore where a building is marketed without an EPC all reasonable efforts must be used to issue the EPC within 7 days of the property going to market and with an absolute deadline for provision of 21 days.

Are there any circumstances where an EPC is not required?

The following properties are exempt from the requirement to provide an EPC:

  • Buildings that do not have a roof or do not have walls, for example a kiosk or multi-storey car park.
  • Buildings which have no heating, ventilation or air conditioning equipment.  This exemption could cover storage units, barns and warehouses.
  • Buildings that are not designed to be used separately.  This exclusion is generally only applicable to common parts of, for example, an apartment block or office building.
  • Religious properties which are used as places of worship and for religious activities (albeit it is not clear whether both worship and religious activities must be undertaken in the building for the exemption to apply or whether either would suffice).
  • Temporary properties that will be used for less than 2 years.
  • Industrial sites, workshops and non-residential agricultural properties with low energy demand. It should be noted that there is no definition of 'low energy demand' but guidance has suggested that this exemption would apply to buildings such as a greenhouse that has heating which is only switched on for a few days to encourage germination.
  • Non-residential agricultural properties which are in use by a sector covered by a national sectoral agreement on energy performance.  This wording is lifted directly from the EU directive on energy efficiency and so far as we are aware there is no such agreement in place as yet.
  • Residential properties which are not used for much of the year.  This is often referred to as the 'holiday' let exemption but is not confirmed to such use.  The basic rule is that property must be used or intended to be used for less than four months of the year ort used or intended to be used for a limited time each year and be expected to consume less than 25% of the annual energy it would used if it was used year-round.
  • Stand-alone properties smaller than 50m2.  This exemption only applies to free-standing buildings which are entirely detached from any other.
  • Buildings that are to be demolished provided that specific evidence of planned demolition can be provided with such evidence differing slightly for dwellings and commercial buildings.
  • Certain listed buildings and buildings in conservation areas.  The law relating to such buildings is complex and government guidance on the point is inconsistent.   The exemption only applies 'in so far as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance'.

In addition to the exemptions for certain buildings, the following property transactions do not trigger the requirement for an EPC to be provided:

There are certain situations where an EPC is not required to be provided:

  • Lease renewals and extensions.  This is not limited to statutory renewals of tenancies with the benefit of surety of tenure and also includes negotiated renewals.  The inclusion of lease extensions in the exception means that reversionary leases (i.e. leases with a future term start date) will also be included.  Please do note however our comments below with regard to compliance with MEES on a renewal lease.
  • Surrenders of leases albeit it is unclear whether this applies even if the landlord pays a premium for the surrender.
  • Not for value transactions although again there is a lack of clarity on when this would apply and as such it might include gifts, sales for nominal consideration, transfer by trustees to either the beneficiary of the trust or new trustees or intra-group transfers for nominal or nil consideration.
  • Compulsory purchase transactions.
  • Transactions involving living accommodation at a work place or which is tied to a job, for example care-takers living accommodation.
  • The grant of a right over property rather than the sale of property itself.
  • The grant of an option or right of pre-emption over a property (with the logic being that there is no guarantee of an actual sale/transaction occurring).
  • Entry into an agreement for lease (albeit an EPC would be required on the grant of the lease).
  • Grant of a mortgage.
  • Variation of a lease that amounts to a surrender and re-grant.

There are also a number of transactions that specifically do require an EPC, despite the fact that they serve little or no purpose.  These include disposals of derelict buildings that do not satisfy the demolition test, the grant of tenancies at will and sale and leaseback transactions.

How long does an EPC last?

The general rule is that an EPC must have been entered on to the EPC register no more than 10 years before it is made available for the purpose of a transaction involving the property.  

When do EPCs have to be displayed?

There is an additional duty under the EPC Regulations to display EPCs in buildings where:

  • It is not a dwelling;
  • The total useful floor area exceeds 500m2;
  • There is a valid EPC in place;
  • The building is visited frequently by the public; and
  • It is not an exempt property.

What properties do MEES apply to?

The MEES Regulations may affect residential, commercial and agricultural property situated in England and Wales that is let on a qualifying tenancy and is required to have an EPC.  Properties that are not required to have an EPC (please see the list above) do not fall within the MEES regime.

What is a 'qualifying tenancy'?

The short answer is that all types of tenancies are 'qualifying tenancies' for the purpose of MEES except:

  • Short tenancies (for certain term of 6 months or less, unless the tenancy contains either an option to renew beyond that initial 6 months or the tenant has already been in occupation for over 12 continuous months prior to the grant of the tenancy);
  • Very long tenancies (for a certain term of 99 years or more).

Licences do not fall within MEES however the position regarding tenancies at will is less clear.  The MEES guidance[1] does not cover tenancies at will and some commentators have suggested that since a tenancy at will does not create a legal interest in land and is not granted for a fixed term they are not covered by MEES although this position has yet to be tested.

It should also be noted that the application of MEES to local authority and public body landlords is reduced meaning that some social housing lies outside the ambit of MEES.

 As such, by way of example, the following tenancies are all subject to MEES:

  • For commercial (i.e. non-domestic) property
    • Lease granted for a premium (whether with or without a rack rent);
    • Leases granted for nominal rent;
    • Reversionary leases (being those granted to commence on a future date which confer no right to immediate occupation);
  • For domestic property:
    • Assured tenancies under the Housing Act 1988  (the HA 1988) (including, therefore assured shorthold tenancies);
    • Residential agricultural occupancies where an agricultural worker is living in accommodation made available to them as part of their employment (so called 'tied accommodation') therefore;
      • Regulated tenancies for the purpose of the Rent Act 1977;
      • Assured agricultural occupancies under the HA 1988; and
      • Protected occupancies and statutory tenancies for the purpose of the Rent (Agriculture) Act 1976.
What are the exemptions to MEES?

If a property falls within the scope of MEES the landlord may still let it (even with an EPC rating of below E) if one of the following exemptions or exceptions applies.

  • Consent exemption (available for both domestic and non-domestic property) - within the preceding 5 years a consent required in order to carry out the relevant energy efficiency improvement works has been refused (despite reasonable efforts by the landlord to obtain such consent), so for example if planning permission or listed building consent is refused for the alterations, or if superior landlord would not approve the works.
  • Devaluation exemption (available for both domestic and non-domestic property) – the landlord has obtained a report from a independent surveyor confirms that making the relevant energy efficiency improvements would result in a reduction of more than 5% of the market value of the property (or the building of which it forms part).
  • Temporary exemptions – a landlord is given 6 months to carry out works (or to register a longer term exemption) during which time it will not be in breach of the prohibition on letting sub-standard property when:
    • The landlord purchases sub-standard property already let to a third party;
    • A lease is granted pursuant to an agreement for lease;
    • The landlord is guarantor to a tenant who has become insolvent, where the lease is subject to sub-tenancies so that the landlord becomes the  immediate landlord to the sub-tenants (this will only occur in very rare circumstances);
    • A third party becomes an overriding tenant (e.g. as guarantor or pursuant to an authorised guarantee agreement);
    • There is deemed creation of a new lease by operation of law;
    • A lease is granted by order of the court; or
    • Renewal of a protected lease (for a non-domestic lease with security of tenure).

The other legitimate reason to continue to let,  or continue to let, substandard property permitted by the MEES regulations is that no relevant energy efficiency improvements can be made to the property or that all relevant energy efficiency improvements that can be made have been made.  This is not a true exemption but does, in fact, operate as one.

The tests for what qualifies as a relevant energy efficiency improvement are different for domestic and non-domestic property and are somewhat detailed but consideration needs to be given to the following points:

  • For domestic property the cost to the landlord of the improvements.  The landlord's contribution is capped at £3500 (including VAT).  If the improvements cannot be carried within this cap, the landlord should install all measures that it can do up to the cap and then register an 'exemption' that the improvements have been installed but the property remains below an E.
  • For non-domestic property that the relevant energy efficiency improvements do not pay for themselves when compared to the resulting savings made on energy bills over seven years following completion of the works.  The MEES Regulations prescribe a very detailed formula for calculating this.

An exemption or exception to MEES must be entered on the PRS Exemption Register before it is relied upon.  Guidance suggests that the exemption will last for up to 5 years (subject to certain caveats or unless the circumstances for claiming the exemption change).  Exemptions are personal and as such if a property is sold the new owner must apply for a fresh exemption.

What are the penalties for non-compliance?

So far as we are aware the EPC Regulations have not yet been enforced, however the local weights and measures authority in each area is responsible for enforcing the EPC Regulations.  Enforcement is usually carried out by trading standards offices who can issue penalty charge notices to those who fail to comply.  The level of the penalty charge depends on the type of property and is currently set out £200 for a domestic property and at a rate of 12.5% of the rateable value of the building, with a minimum penalty of £500 and a maximum penalty of £5,000 for a commercial property (this varies depending in the type of breach).

The period of enforcement is within 6 months from:

  • The date on which the breach was committed; or
  • If the breach is continuing, then the last day of that breach.

MEES are enforced by the local authority for domestic property and by the local weights and measures authority for non-domestic property.   Civil penalties may be imposed which can be either financial or adverse publicity:

  • Financial penalties are 3-fold (for non-domestic property):
  1. For breach of letting restrictions:
  • Breaches lasting less than 3 months for domestic property a maximum penalty of £2000 and for non-domestic a penalty equal to the  greater of either:
    • £5,000; or
    • 10% of rateable value of the property at the date of service of the penalty notice, up to a max of £50,000.
    • Breaches lasting over 3 months for domestic property a maximum penalty of £4000 and for non-domestic a penalty equal to the  greater of either::
      • £10,000; or
      • 20% of rateable value of the property at the date of service of the penalty notice, up to a max of £150,000.

A penalty notice can be served up to 18 months after a breach occurred (i.e. the breach does not need to be subsisting when a penalty notice is served).  This means that the landlord can be prosecuted for past breaches.

It is unlikely that landlords could be prosecuted for breaches incurred by former landlords, but a test case will clarify this.

  1. A landlord who has registered false or misleading information on the exemptions register may also be served with a financial penalty notice up to a maximum of £1000 for domestic property and £5000 for non-domestic property. For registration of false or misleading information on the exemptions register – further details available on request.
  2. Where the enforcement authority has served a compliance notice and the landlord fails to comply with it further financial penalties can be imposed up to a maximum of £2000 for domestic property and £5000 for non-domestic property.

Domestic property is also subject to a maximum penalty cap which provides that the cumulative total of financial penalties imposed for the same breach of the letting provision in relation to a property is £5000.

The enforcement authority can enter details of a breach onto the publically accessible part of the exemptions register.  This might result in adverse publicity for the landlord.  This enforcement action can be imposed in addition to or instead of a financial penalty.

What are the practical considerations?

Buying investment property

When buying an investment property the EPC and accompanying recommendation report should be reviewed as soon a possible (ideally before an offer is made).  If the EPC shows a D or E rating then further information on the basis on which the EPC was commissioned should be requested as if it was based on inaccurate assumptions the rating could be wrong (and may therefore change as and when a new EPC is obtained).  If the seller has relied on an exemption then full details will need to be obtained and if the buyer does not want to (or cannot) carry out improvement works then a new exemption will need to be registered within 6 months of the purchase. If no exemption is available then the cost of improvement works will need to be factored into any offer that the buyer makes. 

Lease provisions and negotiations

The point to be remembered is that the MEES Regulations impose obligations on landlords not tenants so the landlord cannot pass those obligations to the tenant under the lease.  For existing leases it might be possible for landlords to pass the cost of any requisite improvement works onto tenants via the service charge but this would depend on the exact wording of the lease and this option is unlikely to be available for leases of whole.

In terms of negotiating leases it seems sensible from a landlord's perspective (and fair) that a lease should contain a covenant prohibiting the tenant form carrying out alterations that would adversely affect energy efficiency and a landlord may wish to prohibit a tenant from undertaking its own EPC as this could cause issues if the new certificate has a lower rating.

Existing portfolios

Taking into account the fact that from April next year it will be unlawful for landlords to continue to let domestic properties with an EPC rating of below E, landlords would be well advised to start reviewing their portfolios now to identify any problematic properties and what works need to be done to bring their EPC rating up to standard.  Whilst the deadline for non-domestic properties is some way off to avoid significant expenditure further down the line landlords may want to start undertaking any improvement works now to ensure that they do not fall foul of the MEES Regulations in due course.

The law and guidance surrounding EPCs and MEES is lengthy, complex and ever-evolving and this note merely provides an overview on the subject.

Should you wish to discuss any aspect of this note or require further information, please contact Donna Radcliffe or any other member of the Property Team on 0113 244 6100.

The information in this note is necessarily of a general nature and it should not be relied upon in the place of more specific advice tailored to your needs.

   


[1] Covers the Government guidance on both domestic PR (meaning Private Rented) property and non-domestic PR property.  The guidance on domestic PR property was first issued in October 2017 and has been updated subsequently.  The guidance on non-domestic PR property was issued in February 2017.  Please note that the reference to 'PR' has no real significance and does not restrict the application of the MEES Regulations to private sector landlords per se.

 


 

[1] The original target as set out in the Climate Change Act 2008 was an 80% reduction by 2050.  That Act is likely to be amended in June 2019 by the Climate Change Act 2008 (2050 Target Amendment) Order 2019 which unanimously passed in the House of Commons on 25 June 2019.

[2] The Energy Performance of Buildings (England and Wales) Regulations 2012 (2012/3118)

[3] The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (2015/962)

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