The Minimum Energy Efficiency Standards (MEES) will become effective on 1 April 2018. As a landlord or tenant do you know what issues could affect you?
The Minimum Energy Efficiency Standards (MEES) will become effective on 1 April 2018. As a landlord or tenant do you know what issues could affect you?
It is clear MEES could have significant impacts for both landlords and tenants on lettings, valuations, rent reviews and lease renewals. We highlight below a few points to give thought to but firstly a quick reminder of what we’re dealing with.
The Energy Act 2011 first introduced the MEES regulation, which stipulates a non-domestic property with an EPC cannot be let if F or G rated after 1st April 2018. Furthermore, in 2023 all properties with an EPC, whether being let or not, will need to comply. There are some exclusions to MEES, such as lettings under 6 months or listed properties.
A lease renewal under the 1954 Landlord and Tenant Act entitles a tenant to a lease on similar terms to the existing lease. The valuation assumptions are different to rent reviews but should existing case law be applied to MEES compliance this could have a valuation impact on renewal. The disregard of tenant’s improvements under section 34 could result in further valuation complexities if those improvements achieved MEES compliance.
Having a clear idea on where your property stands and what negotiation arguments could be brought to the table and potential solutions is vital.
The onus is on the landlord to upgrade the property through cost effective Relevant Energy Efficiency Improvements (REEI) that must be implemented prior to letting.
Introducing mandatory regulations to improve a property’s energy efficiency is at face value a good way forward to future proof the UK’s building stock and a tool for contributing towards carbon emission reduction targets.
We are in favour of the introduction of such initiatives and the medium to long term view should result in building energy cost savings as well as a reduction in greenhouse gases. As with all new regulations, however, once you start looking at the logistics there are some potential ramifications. There are arguments that the regulations could affect rental values at rent review or lease renewal and therefore, all things being equal, capital values and possibly future yields.
A couple of lease issues to bear in mind:
A rent review at or beyond 1st April 2018 will make certain assumptions on the ‘hypothetical letting’, one of which will be whether tenant’s improvements should be disregarded.
It is quite possible that the property only achieves an energy efficiency rating of E or below because of tenant’s improvements, for example, on building services and new LED lights. Therefore, if improvements are disregarded that fact potentially renders the hypothetical property unlettable in its existing state. Also, can the property be assumed to be ‘fit and available for immediate occupation’ if the required level of EPC is not in place? There are existing recedents that could be extended to apply to MEES compliance. The cost of such improvements could be taken into account at review, and case law and time will judge what becomes accepted. There is an argument that rent reviews before the compliance date, for terms extending beyond, will also reference the requirement as a factor.
A few points to think about:
1. The current EPC rating is key to any future works required and potential lease negotiations. Have you considered the EPC ratings for your properties and are the EPCs robust enough to be scrutinised and verified? Ensuring you have accurate EPCs with all the background data is essential as a first step for any negotiations.
2. Were tenant’s improvements responsible for lowering the EPC to E or better and do both parties have all the necessary documents and consents in place?
3. Is your property E rated? It could slip over the threshold into an F due to future Building Regulations introducing enhanced energy performance requirements. An EPC calculation is dynamic and refers to current Building Regulation requirements. Therefore, future changes to the regulations could see your property move to an F. Plan to future proof these buildings.
4. Are you clear what constitutes an REEI? Can it be implemented as part of a planned maintenance programme?
5. Have you considered the potential impacts for a rent review or lease renewal? Are there break clauses coming up where these regulations may be used for negotiation?
6. Are there any REEI exclusions that apply, for example, are there reasons why consent to any works would not be available or could any REEIs actually devalue a property?
7. As a tenant is it possible you will become a landlord in the future due to a subletting? You will need to consider these regulations in that context.
Two years or 24 months may seem a long way away but the clock isticking to fully consider each property, either owned or occupied, that may be in scope and then plan for the improvements and outcomes.
