Talbot and Muir > Press and Media > Newsletters > Focus 103 – Important changes to lettings post 01/04/2018

Focus 103 – Important changes to lettings post 01/04/2018

14th February 2017 · in

Focus 103 – Important changes to lettings post 01/04/2018 

– Minimum Energy Efficiency Standards Regulations (MEES)

 

Whilst this is a new area of law and much of it is still unclear, MEES will affect your clients that own commercial property in their SIPP & SSAS.  The Department for Communities and Local Government (DCLG) is due to publish guidance on the MEES regulations but we still do not have certainty when this will arrive and the first material date of 1 April 2018 draws ever closer.

What is clear is that compliance under the MEES regulations will be required as follows:

a) From 1 April 2018 in respect of new lettings; and

b) From 1 April 2023 in respect of all

Existing Energy Performance Certificate (EPC) exceptions will still apply, such as:

  • Small self-contained buildings (under 50sqm).
  • Places of Worship.
  • Buildings with no heating or cooling.
  • Listed buildings (probably).

If a valid EPC is in place, it is immaterial whether this was obtained by the landlord or the tenant.

The following new lettings from 1 April 2018 are excluded:

  1. a) Lettings for less than 6 months (where the tenant has not been in occupation during the preceding 12 months); and
  2. b) Leases with a term of 99 years or more.

Under MEES regulations, lease renewals are included. This is somewhat contradicted by the DCLG who have so far implied that lease renewals will not be included.  Further guidance is awaited here and unfortunately it is not possible to offer any material clarity on the same at this stage.

Implications

Where the energy efficiency rating is less than E, the landlord will be required to undertake energy improvement works:

  • These works must be cost effective, based on a 7 year payback mechanism (including notional interest).
  • Works will typically include improvements to the insulation of walls, roofs and windows, more efficient heating, cooling and lighting systems, energy metering and the installation of renewable energy resources.

Even after these works are undertaken it may not be the case that the building will reach an energy efficiency rating of E.  Where this is the case, the landlord will be required to repeat the assessment process in 5 years’ time.

There are some exemptions, but they are not a complete get out of jail card as they will only last for 5 years after which a new exemption must be sought. Such exemptions exist where:

  • All cost effective works have been carried out (and the energy efficiency rating is still below E).
  • Where a landlord is unable to obtain the necessary consents in order to undertake works from:
  1. A tenant under an existing lease.
  2. A lender.
  3. A planning authority where planning permission is required
  • Where works will devalue the property.
  • Where insulation works will damage the property.

In addition to these 5 year exemptions, there are more temporary 6 month exemptions which would apply where TM became an ‘accidental’ landlord under situations such as:

  • A lease renewal (assuming an EPC is required).
  • A new lease is created by operation of Law.
  • A new lease is created to a Guarantor following disclaimer.
  • A new statutory overriding lease is created under the Landlord & Tenant Act 1995.

However, within 6 months landlords must comply with the MEES regulations or register a new exemption.

Enforcements and Penalties

The regulations will be enforced by Trading Standards Officers.

  • Penalties are Civil only.
  • Penalties will be up to a maximum of 20% of the rateable value of the property (capped at £150,000).

Where clients have a lease that exists beyond 1 April 2023 it is important to inform those investors that a Schedule of Approved Works would be required.

In addition, for any new leases being granted, it would be worth checking if the term will continue beyond 1 April 2023. Where this is the case and the energy efficiency rating is below E, a Schedule of Approved Works will need to be agreed at the outset.

Finally, when new commercial property is being purchased, the cost implications of MEES will need to be factored in to the offer price for property below a Schedule E rating.

Should you wish to discuss how these issues may impact on existing client situations, please call our Adviser Support team in the first instance.