From 1 April 2023, following the implementation of Part 3 (minimum level of energy efficiency) of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015/962 ("MEES Regs"), commercial properties in England and Wales having an energy performance certificate (EPC) rating below E will be deemed to be "sub-standard". Landlords of such properties face being prohibited from granting new leases and continuing to let out the properties, and will have just 6 months to make the necessary improvements. Tenants face the risk of increased rent and service charges.
MEES Regs: Landlord's duty
Where landlords intend to grant new leases or continue existing leases of sub-standard properties, they will either need to:
- make 'relevant energy efficiency improvements' to the premises so that it is no longer considered sub-standard i.e. achieve an EPC of E or above; or
- register a legitimate reason on the PRS Exemption Register for not providing an energy rating of E or above.
Although not expressly stated, it appears the required increase in EPC rating will not apply to licences.
There are some exemptions in the MEES Regs for properties not required to have an EPC which include religious and temporary buildings as well as industrials sites or workshops with low energy demand.
MEES Regs: Where there are legitimate reasons to not increase the EPC
Sub-standard property may still be leased where the landlord has a legitimate reason for not improving the energy efficiency rating (and must register that exemption), as follows:
- all relevant energy efficiency improvements have been made to the property but it does not result in the EPC rating increase to E or above.
- no relevant energy efficiency improvements can be made
- one of the following exemptions applies:
1. consent exemption (where the landlord has, within the preceding five years, been unable to increase the EPC rating because a prescribed situation applies AND the landlord has registered the correct information of the PRS Exemptions register before seeking to rely on the exemption) or
2. devaluation exemption (where the landlord has, within the preceding five years, been unable to increase the EPC rating because the improvement would result in a reduction of more than 5% of the market value of the property) AND the landlord has registered the correct information of the PRS Exemption Register
3. temporary exemptions (where the landlord is given six months to comply with the prohibition on letting sub-standard property AND the landlord has registered the prescribed information on the PRS Exemptions Register)
MEES Regs: Recovering the costs of compliance
Landlords looking to grant new tenancies are likely to need to self-fund improvements to make their property compliant. Where a existing tenancy is coming to an end or the property is yet to be let, higher rents might be considered (although the success of this will depend on the bargaining powers of the parties and valuation opinion) or via the service charge provisions in the lease and only where it permits the landlord to recover the costs of improvements.
Landlords and tenants should be considering how best to resolve the issues (including taking early dispute-avoidance advice) created by the changes coming into force next Spring.
If you are a commercial landlord or tenant with property likely to be impacted by the new MEES Regs or you have concerns or questions about how the implementation of the regulations will impact you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies contact.
Contributors
Senior Solicitor
Partner
