Minimum Energy Efficiency Standard (MEPS) – Are you prepared for how this will affect you?

As we predicted in our article in October, following the closure of the consultation period in September 2014, the Department of Energy & Climate Change has now laid its Private Sector Minimum Energy Efficiency Standard (MEPS) Regulations before Parliament.

Commercial property lawyer and energy performance specialist at Keystone Law, John Stephens, said: “We have always expected that the Government would announce this as the next step to try and meet their obligations in reducing greenhouse emissions related to the occupation of property. The real estate sector has been gearing itself up to take on board these new requirements; however, they could have a significant impact for those who are unprepared.”

MEPS will come into force by on 1 April 2018. This means that a landlord of property that falls below the defined minimum energy efficiency rating (Band E) will be prohibited from letting that property unless he first carries out improvements to bring it above the threshold standard. The draft Regulations set the threshold, as expected, at Band E.

Having deliberated on the reposes to the consultation, the DECC has made a number of policy decisions. In outline these are as follows:

Application

The Regulations will apply to landlords on the grant of leasehold interests of non-domestic property in England and Wales. There is a parallel scheme for domestic property. Properties let for a term of 6 months will automatically be excluded (provided that the grant of the interest does not mean that the tenant will have occupied the property for over 12 months). All non-domestic properties are caught except for those that do not require an EPC.

Improvements that can be exempted

The Department of Energy and Climate Exchange expresses the intention that only permissible, appropriate and cost-effective improvements should be required. Consequently, landlords can obtain exceptions on a letting-by-letting basis if:

• The measures required to bring the property up to scratch are not cost-effective on the basis of a 7-year payback period (through anticipated energy savings) or under the Green Deal’s Golden Rule; or
• Despite using reasonable endeavours, the landlord has been unable to obtain a necessary third-party consent, such as a mortgagee or a superior landlord; or
• A suitably qualified expert is prepared to give an opinion that the measures would reduce the value of the property by 5% or more or that wall insulation will harm the property.

When this will start

• 1 April 2018 for leases to new and existing tenants;
• 1 April 2023 for all rented property, even if there is an existing tenant in place and the property occupied;
• In some circumstances, where a lease is granted involuntarily by the landlord, e.g. on a business lease renewal, the landlord is to be allowed 6 months to comply, or demonstrate that an exemption applies.

Enforcement and Penalties

• The Department of Energy & Climate Change expects that these Regulations will be enforced by Trading Standards Officers.
• There will be a centralised register of exemptions that landlords can apply to, in order to establish their exemption. This may be used by the DECC to facilitate targeting their enforcement activity.
• A landlord that lets a non-compliant property for 3 months or more will be liable to a fine of 20% of the rateable value, subject to a maximum of £10,000.

This is clearly going to be of concern to landlords and to tenants and there is a danger that adversarial negotiation will be become more prevalent if parties pursue their interests according to a narrow understanding of where their best interests lie.

Landlords should now be progressing plans to get their portfolios into shape to meet these new Regulations.

Points to address include the service charge, the alterations provisions, the reinstatement provisions, the rent review clause and the provisions for landlord’s access to the property.

Where the property is likely to have a rating below the minimum standard, the landlord should be looking to have the ability to carry out energy-efficiency improvement works during the course of the current lease. Without this the landlord faces having a void between the end of the lease and the creation of a new letting.

Some landlords may be able to take a commercial advantage over their competitors by recognising that providing energy-efficient properties to let to tents will decrease the property’s cost in use to the tenant, make the property more attractive to prospective tenants and give the landlord a reputational benefit. Whether that happy prospect materialises, it is clear what the direction of travel is in relation to policy on energy emissions from buildings.