Landlords: Are you prepared for MEES changes 1st April 2023?
Act now ahead of the EPC standard changes
In less than 6 months the next stage of the Minimum Energy Efficiency Standards (MEES) will be in place. Are you prepared? This blog covers what you can do now to make sure you are ready for the change to avoid significant penalties.
A major driver for this change is achieving net-zero, a target set by many countries and businesses around the world to respond to the climate crisis (specifically the Paris Agreement to keep global warming below 1.5 degrees celsius).
To support this aim, the UK Government’s is raising the minimum energy standard of rented non-domestic buildings to energy performance certificate (EPC) rating B by 2050.
Current energy ratings for letting a property
At the moment, landlords cannot privately let a commercial property or a residential property that has an energy rating of either F or G. This applies to signing entering into a new property lease, renewing a property lease or extending an existing property lease.
Situations where this does not apply:
- Where there is no existing EPC for the property.
- Where the landlord does not need to provide an EPC.
- The lease term is under 6 months (providing this is not part of an ongoing lease that would result in a 12 month term, and the tenant has no right to renew the lease).
- The lease term is over 99 years.
- The landlord has not been able to gain consent to carry out any property improvement work (due to planning permission, consent from any superior landlord, and consent from an existing tenant to access the property).
- The work would reduce the market value of the property by at least 5%.
Do any of these situations look familiar?
If so, as a landlord you can register the property as exempt on a central register, more information about PRS here. Once registered, the exemption will last for 5 years (for that property).
Major penalties for breaching EPC regulations
What if none of the exemptions apply?
As the landlord, you may face a face a fine of up to £150,000 and may be named on a public register for breaching the Regulations.
How are is MEES changing in April 2023?
From 1st April 2023 the MEES will be strengthened for commercial properties; it will apply to continuing existing leases, regardless of whether the lease was granted before 1st April 2018.
This will mean that as a landlord, if you continue to let a commercial property with an EPC rating of either F or G on 1st April 2023 you will be breaking the law, and could face enforcement action. This situation kicked in for residential properties on 1st April 2020.
How can you prepare for the MEES update in 2023?
As a landlord, I recommend that you start preparing now if your plans are not already underway. First, review your portfolio and next, consider the following:
- Property improvement. Do you need to arrange this to achieve at least an EPC rating E? Make arrangements with any sitting tenants to gain access to your property as soon as possible.
- Forward planning. If any of the above exemptions apply, make sure that exemptions are registered in good time.
Commercial property landlords
As a commercial property landlord, you may argue that your tenant should cover the costs given they would benefit from lower energy bills. Specific wording could be added to new leases confirming the agreed position regarding costs, and access rights you may require to carry out improvements. To make sure you are covered, I would recommend seeking professional advice from an experienced property lawyer.
What about existing leases?
Where no such property contract clauses wording exist, as the landlord you may struggle to recover costs. Be aware that property improvement work is also unlikely to be covered by the tenant’s repair covenant.
Residential property landlords
Currently, the Regulations do not give guidance on who will foot the bill for property improvements. As a residential property landlord you are only required to carry out works capped at £3,500 plus VAT.
The opportunity to buy the business should be set out in a buyout agreement, which you can create with a solicitor when making your partnership agreement. Without it, you could end up in court or be forced to dissolve the partnership when one partner wants to leave.
A business valuation is the first step in deciding how much the remaining partner should pay. In a limited company, the departing partner’s shareholding will help you determine a fair buyout price.
The cost implication (explained above) for landlords is significant, on top of the ongoing cost of continual improvements to increase an existing energy rating standard from E to C, then B to meet the 2050 targets.
Regional EPC ratings
The size of the task at hand varies region by region, depending on the local housing stock and the type and age of commercial buildings. As an example, retrofitting Grade 2 listed buildings and 1960s high rise apartments may attract a significant cost.
In the Liverpool City region 94% of offices are currently lower than a B rating. Who will foot the bill to achieve compliance? This is a pressing question the UK Government needs to respond to following the consultation, to ensure targets can be met. As new Regulations are expected to coming into force on 1st April 2025, to be effective the government needs to provide clarification for landlords and tenants. The same applies to taking the long view to reaching 2050 targets.
Why should you act now?
Given the potentially significant cost implications (especially if you have a large property portfolio or let a building with multiple tenants) and time involved, you should begin a review sooner rather than later. If anything unexpected crops up, this means you will still have time to prepare and respond.
What changes are coming on the horizon for EPC ratings?
The UK Government has run consultations, the latest of which ended on 9th June 2021 and a response has not yet been published. In the meantime, my suggestions are The following are being considered:
- Commercial properties – The minimum standard is upped to energy rating B by 2030, which means upping the minimum standard to C in 2027.
- Residential properties – The minimum standard for new leases is upped to rating C in 2025, applying to all existing leases from 2028.
Being considered is whether complying with the Regulations should fall to tenants at all. This is a crucial point that absolutely needs to be clarified by the UK Government.
One thing is certain – higher energy efficiency rating standards are imminent and requirements must be met to make sure it is legal to let the property.
As an example, for a commercial landlord, as a minimum I would recommend:
1st compliance window 2025 to 2027
- Ensuring that all rented non-domestic buildings that are in the scope of MEES have a valid EPC rating by 1st April 2025.
- Reviewing EPC ratings and setting a strategic roadmap to achieve the shorter-term C rating target by 1st April 2027.
2nd compliance window 2028 to 2030
- Continuing the strategic pathway to improve property to achieve rating (if this applies) B by 2028.
- If the building does not achieve the B rating by 2030, it must fall within the rules of exemption.
The UK Government is yet to set out the exact provision for longer term compliance to achieve net-zero by 2050. Watch this space for further updates.
If you have any commercial property queries, whether relating to lease negotiations or to understand your legal position in more detail, please contact me directly.
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