Minimum Energy Efficiency Standards (MEEs)

EPCs and Minimum Energy Efficiency Standards (MEEs)

The New Legislation that Estate Agents and Landlords need to know for avoiding fines and damaged reputations.

Summary

The Energy Efficiency (Private Rented Property in England and Wales) Regulations 2015 was approved in Parliament 26th March 2015 under the Energy Act 2011.  This is the mechanism for implementing and enforcing the Minimum Energy Efficiency standard (MEEs) on Energy Performance Certificates (EPCs) which has been set at a minimum rating of ‘E’.  As such it will be illegal to rent any property with an ‘F’ and ‘G’ rated EPC from April 2016 for domestic properties and April 2018 for Commercial poroperties. 

Current EPC legislation is only for sales, rentals and newly built properties hence EPC legislation in England & Wales will need to be altered for ‘lease renewals’ as these too will be affected.

All agents/landlords should think about the impact, as this will take time to analyse, implement any improvement measures required or make changes to lease clauses (addendums should be carefully planned).

Required actions:

• Some properties will not require any modifications having already achieved the minimum rating (although due diligence must be taken before an EPC expires).
• Some properties will require draft EPCs to establish the rating.  A decision can then be made whether to lodge the EPC (assuming a minimum E rating has been achieved) or if additional analysis is required, to determine the most easily achievable improvements so that these can be implemented quickly.
• A few will require Green Deal Assessments (or other funding sources) depending on the property, tenant and/or landlord.  Currently there are sufficient Domestic Green Deal Assessors but there are only approximately twenty Commercial Green Deal Assessors in the country (March 2015), including ourselves.

If a Green Deal Assessment is required make sure your EPC Assessor is also a ‘Green Deal Assessor’ otherwise the EPC will need to be recreated for Green Deal purposes incurring additional fees.  This is because every Green Deal Assessment also requires an EPC completed either by the Green Deal Assessor (within the past 12 months) or by a trusted assessor as they will need to provide all the data used in the original EPC, assuming the EPC was correct in the first instance.  As former Building Research Establishment (BRE) auditors we know this has not always been the case.

What is the MEEs Legislation?

The regulation only affects ‘Private Rented Property’ i.e. not council properties (giving the latter an unfair advantage in the market). 

Domestic tenants’ energy efficiency improvements comes into force 1st April 2016 and enables the tenant of a domestic private rented property (that is, a property let on an assured tenancy for the purposes of the Housing Act 1988, a property let on a regulated tenancy for the purposes of the Rent Act 1977, or a property let on a tenancy as prescribed by the Order) to make a request to their landlord for the landlord’s consent to the tenant implementing prescribed energy efficiency improvements to the property.  The landlord, and any superior landlord (the party who owns the interest in the Premises - at that time - which gives the right to possession of the Premises at the end of the Landlord's lease of the Premises), whose consent is required before they can be implemented, must not unreasonably refuse consent for the improvements specified in a tenant’s request, unless exemptions set out in the Regulations apply, or the landlord proposes alternative energy efficiency measures.  The tenant may apply to the First Tier Tribunal on the grounds that the landlord or superior landlord has failed to comply with obligations in relation to the tenant’s request.

Domestic property

Subject to exceptions a landlord of a domestic private rented property must not grant a new tenancy (including sub lettings) of the property after 1st April 2018, and must not continue to let the property after 1st April 2020 (i.e. capturing renewals), where the Energy Performance Certificate (EPC) of the property is below band E (i.e. F and G rated properties).

Commercial Property

Subject to exceptions a landlord of a non-domestic private rented property must not grant a new tenancy of the property after 1st April 2018 including sub lettings, and must not continue to let the property after 1st April 2023 (i.e. capturing lease renewals for properties without an EPC), where the Energy Performance Certificate (EPC) of the property is below band E.

Furthermore, the Government proposes to review MEEs in 2020 which will most likely see the standards tighten.  In our opinion the minimum ‘E’ ratings will not be changed to a ‘D’ or above since EPCs are continuously being degraded as and when building regulations, software updates and calculation methodologies are updated so that the same unchanged property can easily drop a band or two with each Building Regulation update (approximately every 4 years).  Hence commissioning an EPC sooner rather than later will naturally help with a better rating.

Penalty notices

An enforcement authority can (on or after 1st April 2018) serve a ‘penalty notice’ in any case where it is satisfied that there is or has been a breach in the regulations at any time in the 18 months preceding the date above.  Where no action is taken, as required by a ‘penalty notice’ within the period specified, the enforcement authority may serve further penalty notices.  A PRS Exemptions Register will be set up by the government for properties which are exempt including the reasons given for the exemption, landlord and property details.  It should be noted, the Register will also contain the name of the landlord or company, details of the penalty notice and properties in breach.

Domestic penalties - financial penalty not exceeding £2,000 in addition to the register/publication penalty i.e. the PRS list.  This rises to £4,000, to a maximum of £5,000 (over the duration) if the matter is not resolved within three months. 

Commercial penalties - financial penalty not exceeding (or whichever is greater than) £5,000 or 10% of the rateable value of the property and the register/publication penalty.  This rises to £10,000 or 20% of rateable value, to a maximum of £50,000 if the matter is not resolved within three months.  Rising to a maximum of £150,000 after the three month period.

Other penalties also apply for false or misleading information or compliance issues for both Domestic and Commercial properties.

What ‘improvements’ can I make?

The recommendations can be found on the EPC itself for domestic properties and on a separate ‘Recommendation Report’ for commercial properties.  Any ‘improvement’ must achieve a simple payback of seven years or less.

Whilst domestic EPCs show all the recommendations including the possible new rating (assuming no building regulation, software update, conventions etc. occur during pre and post EPC improvement), it is advisable to obtain a ‘draft’ EPC before the improvement work commences.  A similar approach should be taken with commercial EPCs since these recommendations do not show what the new rating will be.  Please refer here for further guidance.

As far as MEEs legislation is concerned, the cost of ‘relevant energy efficiency improvement’ must achieve a simple payback of seven years or less:

• Can be wholly financed, at no cost to the landlord (excluding survey fees), by means of funding provided by central government, a local authority or other bodies,
• Can be wholly funded by the tenant making the tenant’s request, or
• Can be wholly financed by a combination of the above

Unless the tenant/landlord is willing to pay for the measures, other routes to funding domestic improvements include the Green Deal Assessments (or when a replacement is found!).  In simple terms the Green Deal offers a package of measures to improve the rating (most of which are part funded via ECO and Home Improvement Funds).  These can be paid upfront or the cost (or balance after taking grants etc. into consideration) of the improvements can be added to the electricity meter as a ‘charge’ over a set number of years.  Naturally the tenant will end up paying for this ‘charge’ unless the property is empty at which point the landlord is liable.  To date (March 2015), over tens of thousands of domestic properties have signed up to the Green Deal which means (in some cases) a ‘charge’ has been placed on the electricity bill. 

Tenants and new property purchasers should specifically make a point of checking their EPC since details of any Green Deal ‘charge’ (total cost, years/months outstanding and interest) are recorded on every EPC.  Our view is that most tenants and landlords will not approach the Green Deal to implement simple or cost effective improvements since adding a ‘package’ of measures will take months to organise and complete.  However, if this is the preferred option, only Green Deal approved installers and assessors can carry out this work and only certified measures can be installed, hence increasing costs on ‘measures’ which might otherwise cost less to purchase and install independently (assuming you already have trusted installers).

Currently there is no funding for commercial properties under the Green Deal.  Unlike domestic Green Deal Assessments, commercial Green Deal Assessments incur greater costs since the assessment/survey is far more complex. 

How to Maintain an EPC Rating?

Landlords need to not only protect themselves before a tenant is found but also to ensure that when tenants vacate the property the EPC rating has not changed for the worse.  Obviously lease clauses and/or ‘green leases’ can be established to ensure tenants leave the property as they find it but this is not always possible.  Adding clauses to leases such as ‘any changes must be made according to current Part L legislation’ would help, however any changes need to be recorded (copy of invoices, manuals etc) and be signed off by a building control officer.  A substantial amount of poor EPC ratings are caused by lack of documentation.  The alternative is to commission an EPC each time a lease is renewed, extended, expires etc. to check the rating hasn't changed (e.g. simply changing or removing lighting in a commercial property will make a significant difference to the EPC rating) and include the extra cost either in contracts, memorandum of understanding etc. (including ‘costs’ for any remedial work if the EPC has changed due to tenant fit-out which may have a detrimental effect).

How should I proceed with the new MEEs legislation?

Exemptions

Most of the exemptions to obtaining an EPC rely on the European Performance Buildings Directive (EPBD) laws, UK legislation and Part L Building Regulations (BR).  Some of these apply to places of worship, listed buildings etc.  If you would like a full list please contact us.  Other exemptions (outside of the above legislations) which apply to relevant ‘energy efficiency improvement’ or combination of relevant energy efficiency improvements, could result in a reduction of more than 5% in the market value of the domestic property, or of the building of which it forms part (e.g. internal wall insulation reducing the internal area of the property).  A tenant refusing to give consent to Green Deal measures can also be used, although this does not apply for empty properties and will also be listed on the PRS Exemptions Register.

Apart from the above, commercial properties also have further exemptions: 

• On a tenancy granted for a term not exceeding six months, unless (i) the tenancy agreement contains provision for renewing the term or for extending it beyond six months from its beginning, or (ii) at the time when the tenancy is granted, the tenant has been in occupation for a continuous period which exceeds 12 months, or
• On a tenancy granted for a term certain of 99 years or more.
• Obtain in writing from an approved independent installer that the ‘improvement’ could cause a negative impact on the fabric or structure.  Note: you will need a letter for each improvement measure from a qualified and accredited installer.
• Does not apply to new landlords until six months after purchase.

This is not an exhaustive list and the full ‘statutory instrument’ is available below.

If you have any queries or would like to know more, please don’t hesitate to contact us.