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Registered providers - will Minimum Energy Efficiency Standards affect you?

From 1 April 2018, it will be unlawful for a landlord to grant a new tenancy of a property that has an EPC rating of below E, unless an exemption applies.

This prohibition applies to both domestic and non-domestic properties. The majority of domestic properties let by Registered Providers are exempt from the requirement. So does this mean that Registered Providers do not have to concern themselves with the obligations in The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (commonly known as MEES)?

MEES, Registered Providers and domestic properties

A domestic property will not be within the scope of MEES if it is:

  • low cost rental accommodation within section 69 of the Housing and Regeneration Act 2008 (HRA 2008) and the landlord is a private registered provider of social housing;
  • low cost home ownership accommodation within section 70 of the HRA 2008; or
  • the landlord is a body registered as a social landlord under chapter 1 of Part 1 of the Housing Act 1996.

This means that bodies registered as social landlords (as set out above) can freely let domestic properties without having to comply with MEES.

However, it is a different story if that Registered Provider is granting a tenancy at market rent through a subsidiary or group company that is not, itself, registered as a social landlord under chapter 1 of Part 1 of the Housing  Act 1996. In these circumstances, the prohibition on granting a new tenancy of a property with an EPC rating of below E on or after 1 April 2018 will apply.

In just over two years' time, this prohibition will be extended to existing tenancies. From 1 April 2020, it will be unlawful to continue to let a domestic property with an EPC rating of below E, unless an exemption applies.

All relevant energy efficiency improvements have been undertaken

However, if a landlord has undertaken all relevant energy efficiency improvements for the property or there are no relevant energy efficiency improvements for the property that could be made, it will be able to lawfully let it notwithstanding the poor EPC rating. An energy efficiency improvement is:

  • A measure for improving efficiency in the use of energy in the property and be listed in the Schedule to the Green Deal (Qualifying Energy Improvements) Order 2012, and identified as a recommended improvement for that property in a green deal report, a recommendation report, or a report prepared by a surveyor; or
  • A measure installed for the purposes of enabling the supply of gas through a service pipe to the property in any case where the property is not fuelled by mains gas and is situated within 23 metres from a relevant main of a gas transporter.

In order to fall within the definition of a relevant energy efficiency improvement, it must be capable of being wholly financed, at no cost to the landlord, by means of funding provided by central government, a local authority or any other person.

The exemption applies for a period of 5 years from the date on which the exemption is registered.

Even if the landlord has not carried out all relevant energy efficiency improvements, if an exemption applies is should still be able to let a property with an EPC rating of below E.

The consent exemption

In essence, this applies if the landlord has been unable, in the preceding 5 years, to improve the EPC rating of the property to an E rating or higher, as a result of a tenant or third party refusing to give its consent. The exemption lasts for 5 years from the date of the refusal.

The devaluation exemption

The landlord will not be prohibited from letting a property with an EPC rating of lower than E if, in the preceding 5 years, the landlord has obtained a report prepared by an independent surveyor which states that making the improvement would result in a reduction of more than 5% in the market value of the property (or the building of which the property forms part). The 5 year period runs from the date of the report.

Temporary exemptions

The regulations give a 6 month grace period to certain landlords (listed in the regulations), by the end of which period they will either have to ensure that the property has an EPC rating of at least E, or that an exemption applies.

It is critical to note that a landlord will only be able to rely on one of the exemptions if it has registered it in the PRS Exemptions Register.

Domestic properties – penalties for breach

If a landlord lets a property in breach of MEES, the validity and enforceability of the tenancy will not be affected. However, failure to comply with MEES can lead to hefty penalties.

  • Breach of less than 3 months – maximum of £2,000 plus the publication penalty (which means publication on the register of the landlord and details of the breach, for a minimum of 12 months); and
  • Breach of more than 3 months – maximum of £4,000 plus the publication penalty.

There are also penalties for registering false or misleading information on the PRS Exemptions Register and for breach of a compliance notice.

What about lettings of non-domestic properties?

There is no exemption for Registered Providers. They will be subject to the obligations in MEES in the same way that any other landlord is. This means that from 1 April 2018,  a Registered Provider will not be lawfully able to grant a new tenancy of a non-domestic property with an EPC rating of below E, unless an exemption applies. The grant of a new tenancy extends to letting the property as a result of an extension or renewal of an existing tenancy. 

This prohibition will be extended to existing tenancies with an EPC rating of below E from 1 April 2023. After this date, the landlord will be in breach each day that it continues to let the property.

Non-domestic properties – are all lettings caught by MEES?

MEES will not apply to very short leases (in most cases leases of less than 6 months will be outside the regulations) or leases granted for a term of 99 years or more.

What if the landlord cannot improve the EPC rating without incurring excessive cost?

As with domestic properties, the landlord will be permitted to let the property if it has undertaken all relevant energy efficiency improvements or there are no relevant energy efficiency improvements that could be made. The definition of relevant energy efficiency improvement for non-domestic properties differs to that for domestic properties. The most significant difference is that the landlord can be required to spend money in carrying out improvement works. That said, the landlord is not obliged to spend uncapped sums.

It will not have to undertake any improvements if they cannot achieve a simple payback of 7 years or less. This is calculated according to a formula set out in the regulations. The exemption applies for a period of 5 years from the date on which the exemption is registered.

Do the other exemptions apply to non-domestic properties?

Yes, the consent exemption, devaluation exemption and temporary exemptions apply. However, again, a landlord will only be able to rely on an exemption if it has validly registered it on the PRS Exemptions Register.

Non-domestic properties – penalties for breach

As is the case with domestic properties, a letting in breach of MEES will not affect the validity or enforceability of the tenancy. However, the landlord could be liable to a substantial fine.

  • Breach of less than 3 months – the greater of £5,000 and 10% of rateable value, subject to a maximum of £50,000 plus the publication penalty (the publication on the register of the landlord and details of the breach, for a minimum of 12 months); and
  • Breach of more than 3 months – the greater of £10,000 and 20% of rateable value, subject to a maximum of £150,000, plus the publication penalty.

There are also penalties for registering false or misleading information on the PRS Exemptions Register and for breach of a compliance notice.

It is clear that Registered Providers cannot sit back and ignore the effect of MEES. Even if they do not have to comply with the obligations for their domestic portfolio, they must look at their commercial portfolios to assess whether or not their properties will comply with MEES. Across a portfolio, breach of the regulations could be costly for landlords, both in financial and reputational terms. The regulations are detailed, and whether or not a letting will benefit from an exemption can be complex to determine. Therefore, you should seek advice from an expert before letting a property which could result in a breach of the regulations

Contributor: Alexandra Holsgrove Jones

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

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