New Regulations For Landlords

Understanding the new Minimum Energy Efficiency Standards

The concept of Minimum Energy Efficiency Standards (MEES) was first introduced by the Energy Act 2011 and, in February 2017, new guidelines were published by the government, including dates when it will become unlawful to let privately rented property that is not up to scratch. The new energy standards will start to come into force in April 2018, so landlords need to review their properties and start taking the necessary action now.

The MEES will first apply to new non-domestic leases and lease renewals from April 2018, to be followed by all existing privately rented residential property on 1st April 2020 and, finally, to all existing non-domestic properties leases by 1st April 2023.

MEES are based on Energy Performance Certificates (EPCs) and, under the new regulations, they will be set at an E rating and above, meaning that a property with an EPC rating of F or G would be labelled as sub-standard and it would be unlawful to let it. Enforcement of these regulations will be by Local Weights and Measures Authority of Local Authorities who will be responsible for imposing the penalty.

An estimated 10% of residential properties and 18% of commercial properties currently have an EPC rating of F or G and will be classed as non-compliant. Where the breach is for less than three months the fine will be equivalent of 10% of the rateable value of commercial properties, subject to a minimum penalty of £5,000 and a maximum of £50,000, and £2,000 for residential properties. Where the breach is for more than three months, the fine will be equivalent to 20% of the rateable value for commercial properties subject to a minimum penalty of £10,000 and a maximum of £150,000, and £4,000 for residential properties.

Furthermore, if the Landlord breaches the MEES regulations, the breach will be published on the exemptions register for a minimum of 12 months.

Is your EPC rating accurate?

It is estimated that a staggering 70% of EPC ratings are incorrect; therefore, it is important for landlords to first make sure their property’s EPC rating is accurate. The high level of inaccurate ratings is due to the varying quality of assessments and changes in practice for carrying them out. EPCs are valid for ten years. Changes that have been made to the property since the last assessment may impact negatively/positively on the rating. Given the significant impact a poor EPC rating could have, it is crucial for landlords to seek professional advice and make sure they have up-to-date assessments.

What are the implications for properties that don’t make the grade?

Not only will it be unlawful to let a property that is classed with a sub-standard rating, but it could also be more difficult to sell the property unless it is upgraded. For those looking to sell a property or to raise finance against assets, a low EPC rating could also have a significant impact on the value of the property. Recently, we saw a savvy buyer reduce their offer on a £4 million property because the EPC rating was below E.

Lenders have cottoned on to the risk of borrowers’ failure to meet MEES; for example, last year, Lloyds Bank launched a Green Lending initiative, providing development loans with a maximum discount of 20 basis points on loans of £10 million or more if the developer meets sustainability targets such as energy efficiency.

Please note these regulations do not apply to tenancies of over 99 years or tenancies of less than 6 months with no right of renewal.

Are there any exemptions?

There are several potential exemptions to MEES, including:

• A potential exemption for listed/historic buildings and those in conservation areas. Such exemptions are not automatic and the criteria to grant them is strict, the criteria being that any compliance with EPC requirements would “unacceptably alter the character or appearance” of a building.
• Where an independent surveyor determines that the relevant energy efficiency improvements would reduce the Market Value of the property by more than 5%.
• The improvements are deemed financially unviable as they do not pay for themselves through energy cost savings within a 7 year time frame.
• If the landlord is unable to get consent from a third party to carry out the energy improvements, for example from the local authority or an incumbent tenant.
• A temporary building only going to be used for 2 years or less.
• A detached building with a total floor space under 50 sqm (538 sft).
• A building that is due to be demolished by the sellor or landlord and they have all the relevant planning and conservation consents.
• A building used as a place of worship or for other religious activities.

An exemption must be registered on the central government PRS Exemptions Register. All exemptions must be registered before 1 April 2018 and are valid for five years. They cannot be transferred to a new landlord.

When is the best time to upgrade a property?

With the first deadline dates looming, when is the best time for landlords to upgrade properties and what are the ‘quick wins’ in terms of energy efficiency? One option is to wait until the end of the lease; however, this runs the risk of having an extended void period while work is carried out. It might be better to work with the tenant to upgrade the building, including implementing tenant incentives for the work to be carried out during the lease. The offer of lease break options is also worth considering to enable an energy efficiency upgrade.

What measures can be taken to improve a low EPC rating?

About 60% of a building’s heat is lost though its fabric and drafts caused by poor sealing are among the top causes of heat loss. Replacement doors and windows are often required to rectify this, but it might simply be a question of installing new or renewing seals. Other measures include cavity insulation and improving roof insulation, but improving a building’s fabric can be disruptive.

Lighting and HVAC – heating, ventilation and air-conditioning – are areas where fairly simple measures can provide large gains. For example, replacing tungsten or halogen spot lamps with LEDs or compact fluorescent tube lighting can make significant savings. Then, there is intelligent switching, such as lights triggered by motion sensors in areas of infrequent and limited duration occupation ensuring artificial light is available only when needed. Computer controlled operation of air conditioning systems enabling easy setting of time and temperature in different zones saves money. Some buildings with extensive glazing can suffer considerable solar gain, straining air-conditioning systems, so reflective blinds, external shades and brise soleills can cut air-conditioning costs.

In a residential property with an EPC rating of E, low cost measurements costing under £500 to increase the building’s efficiency can include cavity wall insulation and low energy lighting and higher cost recommendations include installing a hot water cylinder thermostat, upgrading the heating control and boiler.

With deadlines looming, landlords need to think now about their property’s energy efficiency performance so that they can plan well ahead to minimise the impact of MEES.

For more information on the MEES regulations, and a full list of the measures eligible under the rules, click here. 

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