From 1 April 2018 all leases of commercial properties will have to meet a minimum EPC rating of E (the Minimum Requirements). Properties below this will be considered ‘sub-standard’ in the regulations and will be deemed unfit to let the premises to new tenants without a valid exemption. The requirements will only apply to commercial property on 1 April 2018 but the Minimum Requirements will apply to residential properties on 1 April 2020.
Lease renewals are explicitly included in the transactions to which the Minimum Requirements apply from 1 April 2018. Further to this, in 2023 the Minimum Requirements will apply for all existing leases. Because of this, even if renewal is not expected imminently landlords should consider how they can bring the energy efficiency of their property up to the Minimum Requirements before 2023.
The penalties for noncompliance with MEES are largely based on the rateable value of the property. For the first three months 10% of the rateable value of the property will be payable. This rises to 20% if the property has been leased for three months or more. The maximum fine for non-compliance is £150,000.
There are some properties which are exempted from the minimum requirements. MEES will only apply to buildings requiring an EPC under current regulation and will not apply to tenancies of less than six months (with no right of renewal) or tenancies of 99 years or more.
From 1 April 2018 landlords must register exemptions to central government through an exemptions register. Any valid exemptions which are granted will last for five years.
Landlords will be exempt from meeting the Minimum Requirements for five years when an independent assessor determines 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. This is part of the government Green Deal policy "golden rule" to ensure environmental improvements pay for themselves, in some cases this may not be possible, for example the installation of wall insulation could damage the fabric of the property.
There is also an exemption when a tenant does not cooperate in bringing the property up to the required standard prior to the lease renewal. However, the landlord most show reasonable efforts which can amount to an administrative burden on them to obtain entry to the property to carry out improvements required to reach the Minimum Requirements. A valid exemption is also available if implementation of measures required would decrease the market value of the property by more than 5% in the opinion of an independent surveyor.
The regulations allow a six month period after the purchase of an non-compliant property which is already occupied by a tenant to bring it up to the required standard. This stops the five year exemption from MEES transferring to the buyer in full, so a prospective purchaser should ensure that they can bring the property up to the Minimum Requirements in the six month period.