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Private Rented Sector Minimum Energy Efficiency Standard Regulations Consultation Launched

Wed 30 Jul 2014

On 22 July 2014 the Department of Energy and Climate Change (DECC) issued two consultation papers on the implementation of the Minimum Energy Efficiency Standard (MEES) regulations for the domestic and non-domestic private rented sectors.

Background

The Energy Act 2011 placed a duty on the Secretary of State to introduce regulations to improve the energy efficiency of buildings in the domestic and non-domestic private rented sectors in England and Wales by no later than 1st April 2018. The MEES regulations will require all eligible properties in the private rented sector to be improved to a specified minimum energy efficiency standard. The burden of complying with the MEES regulations will fall on landlords who will be unable to let eligible properties, unless they meet the specified standard. To ease the burden of complying, the government has made a commitment that landlords will not have to face net upfront costs in doing so. The proposed MEES regulations form part of a package of measures which are aimed at domestic and non-domestic buildings (which in 2013 accounted for 21% of the UK’s CO2 emissions) with a view to achieving the government’s legal obligation under the Climate Change Act 2008 to reduce the UK’s net carbon emissions by at least 80% as against a baseline set in 1990. In order to achieve this target the government believes that it must reduce emissions from all buildings to “nearly zero” by 2050.

What properties will be affected?

The MEES regulations will apply to domestic and non-domestic private rented properties that fall below the proposed minimum energy efficiency standard of an EPC E rating. Only those properties currently within the scope of the Energy Performance of Buildings (England and Wales) Regulations 2012 will be affected and so those properties not required to obtain an EPC when let, such as, for instance, those awaiting demolition, will not be within the scope of the MEES regulations. The domestic MEES regulations will apply to all properties which are occupied by a tenant either under an assured tenancy under the Housing Act 1988 or a regulated tenancy under the Rent Act 1977. Non-domestic properties will be within the scope of the MEES regulations if they are let under a tenancy regardless of its length. The consultation paper for the non-domestic MEES regulations requests views as to whether leases for terms of less than six months or more than 99 years should be excluded from the regulations. In both the domestic and non-domestic MEES regulations properties subject to licences will not be caught.

How will landlords comply with the regulations?

The government proposes that landlords of properties with an EPC rating of F or G will not be able to let their properties unless they have undertaken all energy efficiency improvements that would meet the Green Deal Golden Rule. The Green Deal Golden Rule is that repayments under the Green Deal for any improvements, taking into account any available Green Deal Finance, ECO and government grants, must be the same or less than the expected energy bill savings (in the first year). In order to ascertain what improvements will fall within the Green Deal Golden Rule a landlord of a F or G rated property will have to obtain a Green Deal Assessment. The Landlord would not then be compelled to take out any Green Deal Finance that is offered to undertake the eligible works but may simply use the information provided in the Green Deal Advice Report to identify Green Deal Golden Rule complaint improvements. The landlord could then choose to pay for the improvements through any means of its choosing. If the property still remains below a rating of E after all the eligible improvements have been carried out the landlord will be able to let the property but will have to retain evidence of the Green Deal Assessment that was obtained and the measures that were carried out. Where a Green Deal Assessment fails to identify any Green Deal Golden Rule complaint improvements the consultation proposes that the landlord should have to obtain two further Green Deal Assessments. The consultation invites views as to whether this process could be streamlined. As no Green Deal providers are currently operating in the non-domestic property sector, the consultation does invite views as to whether an alternative method of establishing eligible improvements could be devised. One possibility that is mentioned is that the landlord could simply be obliged to carry out all energy efficiency improvements which are “technically, functionally and economically feasible” (borrowing the language of the Building Regulations) and have a prescribed payback period of, say, 15 years. Another possibility is that a landlord could be obliged to carry out the improvements set out in the EPC Recommendations Report and this would remove the need for separate Green Deal Assessments or other feasibility reports.

The Devaluation Exemption

The government is considering the merits of allowing landlords an exemption where the required energy efficiency improvements will result in a devaluation of the property. The government considers this to be an unlikely outcome but, just in case this may happen, it will work with RICS to explore how this exemption could be made to work. The government believes that the decrease in value must be material and suggests a threshold of 5% or 10% may be appropriate.

The Consents Exemption

The government proposes to provide an exemption under the MEES regulations where a landlord has been unable to obtain a required consent from a third party to implement the eligible energy efficiency improvements. This exemption will be subject to further guidance but the consultation proposes that the landlord should be obliged to use best endeavours to obtain any such consents and will need to retain evidence of doing so. Consents which are subject to unreasonable conditions will also give rise to an exemption and guidance will be given as to what would constitute an unreasonable condition.

When and how will the regulations apply?

The government has accepted that there should be a ‘soft start to the MEES regulations meaning that the regulations will only apply to new leases granted to new tenants on or after 1 April 2018. It is currently proposed that renewal leases under the Landlord and Tenant Act 1954 will also be treated as new leases. There will, however, be a backstop of 5 years, in the case of non-domestic properties, and two years, in the case of domestic properties, meaning that all non-domestic private rented properties will have to be compliant by 1 April 2023 and all domestic private rented properties compliant by 1 April 2020, regardless of when the lease to which they are subject was granted. This proposal is likely to be controversial but the government was initially aiming to achieve a ‘hard’ start in 2018 so this represents what is hopefully a workable compromise. One issue that the consultation does not address, however, is how those properties subject to longer leases which do not currently possess an EPC would be caught by the regulations. On the proposed backstop dates any exemptions will need to be established again regardless of whether the exemption applied previously. Therefore, it appears that if no improvements to a non-domestic property fell within the Green Deal Golden Rule on 1 April 2018 then on 1 April 2023 the landlord would have to obtain a new Green Deal Assessment (or whatever alternative assessment is available) to prove that this ‘exemption’ still applied.

What will the penalties be for non-compliance?

The government suggests that the Trading Standards Officers (TSUs) within local authorities are likely to be the enforcement officers for the MEES regulations although, ultimately, local authorities will be free to decide which of their teams has the enforcement role. The government proposes that the formula for calculating the penalty for non-compliance should be set at a sufficiently high level that will persuade landlords to comply. In the case of domestic properties it is proposed that the penalty is set at a level equivalent to the rent for the property for the period of non-compliance. This approach could also be adopted in relation to non-domestic properties. However, the government notes that rent free periods are currently prevalent in non-domestic leases which will complicate and potentially undermine a penalty calculation on this basis. The government’s alternative proposed formula in relation to non-domestic properties, therefore, is to calculate penalties by using a percentage of the rateable value of the property. No actual percentage is specified in the consultation paper.

How will compliance be ascertained ?

One of the challenges for landlords as well as for enforcement officers will be to determine whether or not a property is or is not compliant with the regulations. Landlords will want certainty that their properties are compliant and this may be difficult to establish where, for instance, an exemption applies. The government is therefore exploring whether exemptions could be certified by a third party upfront so that there will be no residual risk of any enforcement action. Landlords could be encouraged to submit details of any exemption to a local authority and the local authority could then certify that the exemption applies. This system could be voluntary or mandatory but, as the government does state that its overriding objective is to keep the cost of enforcement as low as possible, this may militate against a mandatory certification option being adopted.

Conclusion

The consultation papers have been informed by cross - industry property working groups who have made a series of recommendations to DECC as to how these regulations could be implemented. It is therefore questionable whether DECC will wish to embark on a wholesale re-think of the regulations at this stage but there should still be considerable scope to influence the government’s thinking on their detailed implementation. Winckworth Sherwood’s Real Estate team would be delighted to co-ordinate responses on behalf of interested parties. Responses must be submitted to DECC by 2 September 2014.

Christopher Brigstocke, a Real Estate Partner at Winckworth Sherwood, was a member of the Non- Domestic Minimum Energy Efficiency Standards Working Group that advised DECC on these regulations.

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