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Landlords – how will MEES affect lease renewals?

In less than six months' time, it will be unlawful to grant a new tenancy of a property with an EPC rating of below E, unless an exemption applies and has been validly registered.

Lease renewals are not excluded from the prohibition so if you are a landlord with a portfolio that includes business leases with security of tenure, you may have to change how you approach lease renewals.

So what might landlords need to do differently in the run-up to, and after, 1 April 2018?

Providing an EPC on lease renewals

It is common practice not to provide an EPC on a lease renewal. This is in line with current government guidance, which states that lease renewals are not considered to be a sale or letting to which the duty to provide an EPC applies. Whilst the guidance gives no specific reason for its view, it is likely that the rationale is that an EPC is provided to enable the potential tenant to consider the energy performance of the property as part of its investment. If the tenant is already in occupation, the EPC becomes redundant.

However, this practice may need to change from 1 April 2018.

Why may landlords need to provide EPCs on lease renewals from 1 April 2018?

Under The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (the MEES Regulations), it will be unlawful to grant a new tenancy of a property with an EPC rating of below E (known as a sub-standard property) on or after 1 April 2018, unless an exemption applies and has been validly registered.

Lease renewals are explicitly included in the tenancies to which the MEES Regulations apply. If EPCs did not need to be provided on lease renewals, how would this work? Would the landlord remain outside the scope of the MEES Regulations until an EPC was commissioned? This could result in landlords being able to continue to grant tenancies of sub-standard properties, regardless of the fact that lease renewals are within the scope of the MEES Regulations. Therefore, it is unlikely that this was the intention.

Do landlords need to provide EPCs for new tenancies granted on or after 1 April 2018?

The prudent course of action would be for landlords to provide EPCs on lease renewals. This could, of course, lead to difficult consequences for the landlord in the event that the EPC rating was less than E. In such cases, the landlord would either need to carry out works to bring the property up to an E rating, or show and register an exemption.

Carrying out works – issues on lease renewals

Access issues are going to be a major concern in a lease renewal. The tenant will already be in occupation and running its business from the premises, and may be reluctant to allow the landlord access to carry out energy improvement works.

Will the landlord be able to get improved access rights as part of the renewal lease?

On a lease renewal, there is limited freedom to change the terms of the lease. The position is governed by section 35 of the Landlord and Tenant Act 1954, which states that you must consider the terms of the actual lease and all the relevant circumstances. The House of Lords' decision in O'May [1982] is the leading authority on the exercise of the court's discretion under section 35.

In essence, it comes down to whether imposing a new term would be fair on the parties. A court may be reluctant to impose greater access rights for a landlord where such a provision may disrupt the tenant's business. On the other hand, public policy considerations of improving energy efficiency may encourage courts to impose MEES-friendly provisions. At the moment, without case law on the point, the position is uncertain.

What if the landlord cannot get access rights in the renewal lease?

The MEES Regulations contemplate the possibility that the landlord may not be able to get consent to carry out energy improvements works. In such cases, the landlord may be able to register a consent exemption, and can rely on that for 5 years (or until the tenant moves out, if earlier).

Does the landlord need to do the works, or register an exemption, prior to the grant of the renewal lease?

No, a temporary exemption is available to landlords on lease renewals where a lease is granted pursuant to the security of tenure provisions of the Landlord and Tenant Act 1954. This exemption runs for six months from the date on which the renewal lease is granted. However, to rely on this temporary exemption, the landlord must register it on the PRS Exemptions Register.

Does any action need to be taken prior to 1 April 2023?

It will be unlawful to continue to let a sub-standard property on or after 1 April 2023, unless an exemption applies and has been validly registered. So, does the landlord need to commission new EPCs so that it can ascertain whether or not the properties in its portfolio are sub-standard?

Landlords will be relieved to hear that they do not. A landlord only needs to provide a valid EPC when a trigger event occurs. This is likely to be when it sells or lets the property.

Therefore, if, on 1 April 2023 there is a tenancy in place but the EPC is more than 10 years' old, the property will not, at that date, be within the scope of the MEES Regulations. However, as soon as an EPC is commissioned which shows the property to be sub-standard, the letting will be within the scope of the MEES Regulations. Therefore, the landlord will either have to do works to bring it up to an E rating, or show and register an exemption.

So that landlords are not suddenly hit with requirements to carry out works or register exemptions, they would be prudent to ascertain those properties within their portfolios that are at risk of having low EPC ratings.

What now?

1 April 2018 is fast approaching and action needs to be taken now. Even landlords who will benefit from an exemption cannot sit back – a landlord can only rely on an exemption if it has been validly registered. Therefore, if a landlord thinks that it will be able to rely on an exemption in respect of a lease that will be granted on or after 1 April 2018, it needs to set the registration of that exemption in motion now. This may involve getting reports and quotes from surveyors. Moving forward, landlords and managing agents are going to need robust systems in place for ensuring that any exemptions do not lapse. Being in breach of the MEES Regulations won't just result in a potentially hefty fine; it could also lead to reputational damage.

TLT has a dedicated hot topic page on the MEES Regulations with regular updates. If you want to discuss any MEES-related issues, please get in touch.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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