Partner Katja Wigham, in our Commercial Property team, provides an update for landlords on the Minimum Energy Efficiency Standards (MEES) regulations.
From 1 April 2018, the Minimum Energy Efficiency Standards (MEES) regulations will make it unlawful for landlords to lease a property which has an EPC rating of grade F or G, with the imposition of significant fines and one off penalties. The impact that the regulations will have on the private rented sector are likely to be far reaching, affecting matters such as dilapidations, rent reviews and Landlord and Tenant 1954 Act (‘the Act’) renewals.
Whilst buildings with grade F and G ratings will be immediately at risk, properties with higher ratings of grade D and E may also be at risk if they are subsequently re-rated and found to be non-compliant. The risk to landlords in this regard is that re-rating is likely to be driven by commercially aware tenants who are seeking improvements to the property that they are occupying or are using the regulations as a negotiating tool in order to secure more favourable lease terms.
Dilapidations
Will non-compliance with the MEES regulations diminish a claim for dilapidations?
It may be the case that a week or two before the lease expires on a D rated property; the landlord obtains an estimate of the cost of dilapidations that it will look to claim on expiry. What would happen if, before the lease expires, the tenant obtains a new EPC and the property is downgraded to F?
The landlord would be prevented from re-letting the property and the tenant could argue that works required by the MEES regulations to bring the property up to compliance standard supersede any repair works that it is liable for; thereby diminishing the landlord’s dilapidations claim.
The landlord would therefore need to present a strong argument that any substantive works required to bring the property into compliance with the regulations do not negate the tenant’s repairing responsibility under the lease, and the landlord’s right to pursue a claim to recover the cost of any related remedial works.
Lease negotiations
How will non-compliance with the MEES regulations impact upon negotiating strength of the landlord and tenant?
If a compliant property is re-rated and the rating achieved is below grade E (either before or following 1 April 2018), the tenant might seek to negotiate more favourable terms. For example, for new leases, MEES improvements required to achieve compliance might necessitate a lower starting rent or rent concession during the period of works. Further:
Rent Review – If a previously compliant property is re-rated and downgraded (either before or following 1 April 2018), the tenant might seek to drive down the rent on review as a result of the non-compliance. The tenant might argue, for example, that a willing landlord cannot let a non-compliant property or that the property has no market value because a letting would contravene the regulations.
Break Options – The tenant of a non-compliant lease might seek to drive down the rent in exchange for not exercising an option to break (thus giving the landlord longer to rectify the non-compliance). Landlords will not, though, be able to continue the letting of a non-compliant property from 1 April 2023.
Landlord and Tenant 1954 Act renewals – Section 34 of the Act requires that tenant’s improvements to a property are disregarded for the purpose of ascertaining the level of rent under a Part II renewal. What would happen if the tenant’s improvements resulted in a previously non-compliant property achieving a complaint rating of grade E or above? Disregarding the improvements would render the property non-compliant for the purpose of ascertaining the rent, at which point the tenant might try to argue a lower rent or rent concession in respect of the period during which the landlord is required to bring the property into compliance with the MEES regulations. However, landlords obliged to grant a new lease under the Act will have 6 months within which to comply with the regulations (provided that they register this temporary exemption).
Is it not yet clear how these issues will be approached and resolved following 1 April 2018. In the meantime, landlords should consider carefully how to mitigate these risks and strengthen their position. They should also carefully review their lease precedents to consider what drafting should go into leases now to protect their position as much as possible in the future.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
