Consultation on a performance-based policy framework in large commercial and industrial buildings
As required by the Energy Act 2011, regulations have been introduced governing energy efficiency in the non-domestic building space. These are the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962), which require a minimum energy efficiency standard (“MEES”) to be met before properties can be let in specified circumstances.
EXEMPTIONS FROM MEES
1. Consent exemption: within the preceding five years the landlord has been unable to increase the EPC rating because they have not been given consent (by a tenant where necessary, or third parties including superior landlords or charge holders) despite reasonable efforts to obtain it and the landlord has registered the correct information on the PRS Exemptions Register;
2. Devaluation exemption: the landlord has within the preceding five years been unable to increase the EPC rating because the landlord has received a report from a surveyor stating that making the improvements would result in a reduction of more than 5% in market value of the property and the landlord has registered the correct information with the PRS Exemptions Register; and
3. All improvements made exemption: the landlord has made all the relevant improvements that can be made, or there are no relevant energy efficiency improvements that can be made. The landlord must register the appropriate information on the PRS Exemptions Register.
WHICH PROPERTY COUNTS AS NON-DOMESTIC PRIVATE RENTED PROPERTY?
There are a number of considerations, one of the main being that the property is let under a qualifying tenancy. There is no definition of “qualifying tenancy” in the MEES regulations or in the Energy Act 2011. However, the non-domestic MEES guidance indicates that the regulations do not apply to properties which are occupied under a licence. Therefore, if for example, the subject property is a hotel and is operated under the provisions of a management agreement, then assuming that the arrangement operates purely under the terms of a licence and it does not constitute a tenancy between the parties (there are many factors which would need to be considered before determining whether occupation has been set up as a lease or a licence), then it would be unlikely to qualify as a tenancy and would not come within the MEES regulations. In addition, short tenancies and very long tenancies (as defined in the MEES regulations) do not fall within the MEES regulations.
UPCOMING DEVELOPMENTS TO THE MEES REGULATIONS
EPC C by April 2027
Landlords should be conscious of the requirement of obtaining a minimum rating of EPC B by 2030 and also think about the newly proposed interim milestone of a minimum rating of EPC C by 2027.
· A newly established national PRS Compliance and Exemptions database: The submission of an EPC certificate two years in advance of the relevant deadline will be to a newly established PRS Compliance and Exemptions Database. The new database will help local authorities identify buildings which need an EPC and which buildings fall short of the required EPC standard on the deadline. Tenants and investors will be able to access this public database to ensure that any property they are considering is compliant with MEES regulations.
· Tenant obligations: The government will consider making changes to the PRS Regulations to impose duties on tenants of non-domestic buildings regarding compliance with the MEES regulations. These would include duties of cooperation on both landlord and tenant to achieve compliance.
· Large buildings over 1,000m²: The government has indicated in a separate consultation that it will introduce a new framework for buildings over 1,000m², requiring building owners and single tenants to obtain a performance-based rating annually and to publicly disclose that rating online. This building category has been singled out because, while these buildings account for only 7% of all non-domestic buildings, they use over half of the total energy used and carbon emitted by non-domestic stock.
Why care about compliance with MEES?
· Landlords: MEES imposes fines for non-compliance which threaten to outweigh the costs of repurposing buildings to meet the minimum energy efficiency standards required. If a landlord wishes to sell, they may find that the value of the property drops since a potential purchaser has to factor in improvement costs. Additionally, tenants may ask to pay less since the property’s energy efficiency is sub-standard. By August 2019, not a single prosecution under MEES had taken place for a landlord who failed to reach the required standards¹. The issue has been that the Trading Standards and Environment Health department, responsible for MEES enforcement, has not had the resources to police the issue. This explains the government’s focus on practical enforcement in their recent consultation. As the April 2023 deadline for continuing leases approaches and enforcement becomes easier, a stricter government approach looms. Landlords therefore cannot afford to be complacent and must begin to take steps to ensure they are MEES compliant.
· Purchasers: If a purchaser wishes to let a property in the future, they should consider the impact a sub-standard condition would have on their ability to let. They would not be able to grant a new lease (currently) or continue an existing one (from April 2023) without the risk of enforcement action. The purchaser would need to consider costs of improvement to the property’s energy efficiency, consider how that cost could be shared with tenants and think about any potential exemptions from MEES.
OTHER KEY CONSIDERATIONS
If any agreement or licence would not otherwise fall within the definition of non-domestic private rented property, particularly where landlords may wish to deal with cost apportionment for energy efficiency improvement works in any new leases – As mentioned above, upcoming government guidance is set to cover this issue and will shed more light on this but dealing with this now in negotiations and documentation minimises short term risk.