Be A Better Landlord ~ 5 ~ MEES and the EPC

Guide to Minimum Energy Efficiency Standards (MEES) and the Energy Performance Certificate (EPC)

From April 2018, a new legal standard for minimum energy efficiency will apply to rented properties in the private sector. The new legal standard brings threats and opportunities for landlords, freehold investors, developers and lenders, this blog is intended to outline what Minimum Energy Efficiency Standard (MEES) are and what landlords should do now to minimise the effect of MEES on their rental property.

What is the minimum energy efficiency standard (MEES)?

The minimum energy efficiency standard (MEES) was introduced in March 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations

2015. The MEES Regulations originate from the Energy Act 2011 which contained the previous coalition government’s package of energy efficiency policies including the Green Deal.

Currently domestic buildings have an energy efficiency rating that goes from A – G. F and G are the worst performing. The new law introduces a minimum rating standard of E and that means that buildings which do not achieve that standard cannot be rented out.

From 1 April 2018, landlords of properties within the private sector must be within the scope of the MEES Regulations, and so must not renew existing tenancies or grant new tenancies if the building has less than the minimum rating as shown on the energy performance certificate (EPC) rating of E unless the landlord registers an exemption.

Why is the government introducing MEES?

The housing market has been identified by government as a major contributor to Greenhouse Gas (GHG) emissions and thus poses a threat to the UK meeting its carbon reduction targets for 2020 and 2050. While Building Regulations ensure that new properties meet current energy efficiency standards, MEES will tackle the UK’s older buildings.

It is important to note that the minimum standard could rise in future, it is considered that by 2023 the minimum standard will move up to D and five years after that to a C rating on an EPC.

However a property can be exempt, this will require an application to be registered, once registered then the property can continue to be let in the usual way. The exemptions will include those properties where:

The ‘Golden Rule’ hasn’t been met: where an independent assessor determines that all relevant energy efficiency improvements have been made to the property or that improvements that could be made but have not been made would not pay for themselves through energy savings within seven years. There are numerous examples of “relevant” energy efficiency improvements which include double-glazing and pipework insulation which need to be considered; wall-insulation measures are not required where an expert determines that these would damage the fabric of the property.

Devaluation of the property would occur if improvements were fitted: where an independent surveyor determines that the relevant energy efficiency improvements that could be made to the property are likely to reduce the market value of the property by more than 5%.

Third Party Consent: where consent from persons such as a tenant, a superior landlord or planning authorities has been refused or has been given with conditions with which the landlord cannot reasonably comply.

Exemptions must be registered on the central government PRS Exemptions Register. The exemptions are valid for five years only and cannot be transferred to a new landlord.

What are the penalties for non-compliance?

The MEES Regulations will be enforced by Local Weights and Measures Authorities (LWMAs). LWMAs will have powers to impose civil penalties which are set by reference to the property’s rateable value. The penalty for renting out a property for a period of fewer than three months in breach of the MEES Regulations will be equivalent to 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000. After three months, the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.

Threats and opportunities for landlords

Landlords are likely to be the most affected parties because the key obligations and restrictions in the MEES Regulations fall on them.

• The most obvious threat to landlords is the financial cost of upgrading non-compliant buildings and the potential loss of income if a property cannot be rented out.
• Standard leases may not contain sufficient restrictions on tenants subletting which could trigger the landlord’s obligations
• Income from the rent may not allow a landlord to recover the capital expenditure required for improvements from the tenant
• The landlord’s rights to enter may not extend to entry for installing energy efficiency improvements or there may be restrictions in a headlease to consider.

There are however plenty of opportunities

• For innovative landlords to engage with tenants and to enter green leases where the environmental management and costs of the property, such as energy efficiency improvements and utility bills, are shared for the benefit of both parties.
• There is also the potential to increase rental and asset value through making energy efficiency improvements and combining these with other refit upgrades.

Landlords can prepare now by:

• carrying out energy assessments to check whether the EPC ratings for their properties are correct, if they can ask their assessor to do a desk-top exercise and look at properties which have a low rating
• fit the more cost effective improvements now like lofts, heating, glazing working with a assessor it should be possible to predict which improvements might raise the rating and take the property above the minimum standard
• review leases to understand their rights
• audit their property portfolios to understand which properties are within scope of the MEES Regulations and whether exemptions might apply

MEES has the potential to ensure that a property which is maintained to a higher rating on an EPC yields better rental income. This legislation is coming so better to act now than lose your investment or income through non-compliance, fines and loss of revenue.