Minimum Energy Efficiency Standards (MEES) and their impact on Landlords
Many people have an opinion on what impact MEES have had since coming into force in April 2018, but nobody really knows what all the consequences are and will continue to be. Until there is some case law, the regulation is untested and the law of unintended consequences will probably be in play. Beware of anyone who claims they can give you certainty.
On the face of it you cannot let a building with an EPC rating of F or G and various people will disagree about how this will affect lease renewals and rent reviews. I recently attended a lecture in which the speaker questioned what an unlettable building would be worth to an investor. The audience shuddered as they contemplated the prospect.
It seemed to me that the speaker grew to menacing proportions as he proclaimed from his pulpit “SINNERS!! Ye who let a building with an EPC of F or G shall be cast off and consumed by local authority-imposed fines of up to £150,000 per quarter, per tenancy!” Heavy stuff. We are stoic fellows though in the Lease Consultancy team at Allsop, so I raised a nervous hand and asked about exemptions. Rather than me being struck down by a bolt of lightning, as I had half expected, I was pleased to note that the speaker became notably less strident. The discussion opened up and focused on what you can get away with.
It turns out that the exemptions cover quite a lot, including anything expensive; begging the question, why are we worried? As long as you jump through the hoops to get your exemptions in the first place, the cost of compliance is not high. The most significant ‘get out of jail free card’ is the exemption from doing anything at all unless it will pay for itself over seven years. Put that another way: MEES will only affect those landlords who are reluctant to invest on a YP of 7: a 14% annual return! I have simplified this for dramatic effect, of course. As I said in paragraph one, beware of anyone who claims they can give you certainty. The point I want to make is that complying with MEES is not very expensive, so don’t get rushed into expensive pre-emption measures. Exactly how you calculate a seven-year return is not yet clear. Does it, for example, depend how much you, or the tenant, pays for electricity?
How MEES will be enforced seems to be unclear too. We were told that local authorities will enforce MEES and keep the revenue generated from fines, but whether these fines can be backdated, whether they are cumulative and whether they apply if you have an inaccurate EPC that shows C but is really F, all seemed to be rather uncertain.
After all that uncertainty, here is a little practical advice borne from recent experience. If your building has an EPC below E:
Firstly, get a new EPC done; you will quite likely find that a well conducted EPC will result in a dramatically improved rating compared to the EPCs created five or ten years ago. Ten years ago, nobody cared what the rating on the EPC was as long as you had one. Consequently, nobody paid for a thorough one and they got an EPC based on the worst-case scenario.
Secondly, make sure the new lease assumes a decent EPC for rent review purposes. Nobody seems to be talking about this, but in five years’ time buildings which don’t meet the MEES will supposedly be ‘unlettable’ for the purposes of the hypothetical transaction of the rent review. Ask your solicitor how you might deal with this – before the draft lease is finalised.