Over the course of the summer, the Department of Energy & Climate Change has been consulting on draft regulations to be applied to the private rented sector relating to Minimum Energy Performance Standards (MEPS) under the Energy Act 2011.
Based on these consultations the Department will produce its Private Rented Sector Energy Efficiency Regulations (Non-Domestic) (England and Wales). This is the latest step in the process by which the Government hopes to meet its obligations in in terms of the reduction in greenhouse emissions related to the occupation of property.
When will it come into force?
MEPS will be in force by April 2018 at the latest.
What does this mean for landlords?
If a property falls below the defined minimum energy efficiency rating, the landlord will be prohibited from letting that property unless it first carries out improvements to bring it above the threshold standard.
What is the threshold standard?
The threshold standard has not been established yet, but the energy performance bands run from A to G and the current best guess is that the threshold will be at E so that E-rated premises and above will be safe.
This does not, of course, preclude the possibility that the threshold might be raised at a later date; it would be courageous to think that the threshold might be reduced, in the current circumstances. These requirements will therefore apply to more than just shanties and slums.
This is clearly going to be of concern to both landlords and 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.
What should landlords be doing now?
In preparation for the changes, landlords should now be planning and reviewing their leases to find opportunities to get their portfolios into shape to meet these new circumstances.
Some points that may need to be looked at – and one size will not fit all properties, tenants or leases – including the service charge, the alterations provisions, the reinstatement provisions, the rent review clause and the provisions for the landlord’s access to the property.
Service charge regime
The service charge regime may not have been drawn with this type of circumstance in mind, which may leave a shortfall that relates to works that go beyond the repair or renewal of services or common items that may still, in themselves, be capable of having an economic life.
Access for the landlord
The landlord may, if it is carrying out the retro-fitting of energy efficiency measures itself, need access to the property in order to carry out works, and the lease may not necessarily provide for this.
Is the tenant responsible for ensuring the work is completed?
Landlords may seek to argue that the normal clause that appears in leases that the tenant is responsible for compliance with statutory requirements will put the tenant in the position of having to carry out, or at least pay for, the works where they are required to meet MEPS. However, this argument is not likely to get too far as under section 49 of the Energy Act the regulations are such that there is no requirement to carry out upgrading; it will just be illegal to let property below the minimum standard unless upgrading has been carried out.
Some landlords may seek to find that the tenant’s repairing obligation extends to carrying out these works. Whether this approach has merit rather depends on what works are required; it would be unusual for a tenant’s repairing obligation to require the tenant to carry out improvements to items that are not in themselves in disrepair.
Where a building meets minimum standards
Where the landlord believes that the property will be above the minimum standard, the landlord will want to make sure that the tenant is not in a position where he can do things to the property that might affect the energy performance rating adversely, and so will want to have absolute control over alterations that may have that effect.
Where tenants currently have more freedom in relation to carrying out alterations, the landlord may try to impose an express prohibition on alterations that adversely impact on the EPC rating. For some tenants who have high-energy use, it may be that the landlord would be prepared to grant consent provided there were stringent reinstatement obligations so that the property could be brought back above the minimum standard at the tenant’s cost once that tenant has ceased to be in occupation.
Where a building fails to meet the minimum standards
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 tenants 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 public policy on energy emissions from buildings.
Keystone Law is at the cutting edge in relation to these developments with one member of our team carrying out postgraduate research on it at Nottingham Law School. We therefore understand how this can affect you and would be delighted to discuss with you how to make and implement plans to deal with these changes and protect the value of your investments.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.