Energy Performance Certificates and M.E.E.S.
This is important reading for any existing lessee/tenant or may be considering assigning their lease and anyone thinking about taking a lease or tenancy.
This is a hot topic, broadly based around energy efficiency and associated dilapidations. What we are looking at is the passage of time and two associated quotations particularly stand out.
The bad news is time flies. The good news is you’re the pilot “ Michael Altschuler.
The time for action is now. It’s never too late to do something “ Carl Sandburg.
The Energy Efficiency Regulations 2015 laid down that from the 1st April 2018 (yes that’s only six months away) it will be unlawful to grant a new commercial lease, as commercial lease renewal or a commercial lease extension to an existing or new tenant of a property that has an Energy Performance Certificate of F or G. From 1st April 2023 it will be illegal to allow existing lettings of F and G rated properties to continue.
There are considerable teeth in the new legislation concerning Minimum Energy Efficiency Standards (MEES) because the requirements link to previously issued Energy Performance Certificates (EPCs) many of which are inaccurate and were not the subject of any independent checking system.
Whilst it is appreciated that there are a large number of competent and accurate EPCs, we have seen some very sloppy certificates, even with complete floors being missed out.
It is more than likely that M.E.E.S. is unknown to you. However it will become very much a hot topic when the legislation bites!
WHICH LEASES ARE CAUGHT BY THE NEW MEES REGULATIONS?
The intention of the new legislation is to stop a new letting of a sub-standard property which not only is the grant of a brand new lease, but is also the granting of an extension to an existing tenant. This then cross-references with the new Pubs Code and the steadfast mantra issued by the six companies affected by the legislation that MRO can only be issued on the back of a new five-year lease. Curiously if a Deed of Variation for supply-terms is the preferred route, the MEES Regulations don’t apply. So if the new five-year lease route is taken the MEES Regulations will apply to every MRO lease with NO exceptions.
SHOULD COMMERCIAL LANDLORDS BE WORRIED BY THE MEES REGULATIONS?
A well advised tenant is perfectly at liberty to seek his/her own re-assessment of a current EPC with many of the previous EPCs that were issued from 2008 onwards being considered as inaccurate. They only have a lifespan of ten years so the very early ones are now nearing expiry. We think it likely that there are many properties with ratings of E or even D that could easily be downgraded to either F or G on re-assessment. So what is the knock-on effect of a very accurate EPC highlighting that the property is sub-standard.
If a Schedule of Dilapidations (it should be Interim not Terminal) is issued on the back of a proposed new five-year lease linked to MRO a new EPC could show that non-compliance with the MEES Regulations will render the Landlords Dilapidations Schedule subject to supercession to comply with the required updated works.
Rent reviews of a sub-standard property will be interesting as it is the Landlords responsibility in every single case, not the tenants, to put the building into MEES compliance.
New lease negotiations will also present a new set of ground rules if a sub-standard property is being let prior to the implementation of the MEES Regulations from 1st April 2018.
ARE LANDLORDS AWARE OF THE NEW REGULATIONS?
Curiously very little has been mentioned as the clock ticks down towards 1st April 2018. This is specifically linked with the requirement side-by-side with MRO for Dilapidations Schedules well in advance of any decision from the PCA regarding the direction to be taken for the grant of MRO. Make no mistake, it is the Landlord that is responsible for ensuring that a building is MEES compliant, not the Tenant. In the normal world, out of the clutches of MRO, it would be sensible in the coming months for Landlords of F and G rated buildings to seek to circumvent incurring MEES penalties (fines of up to Â£150,000 per three monthsâ€™ infringement) by hurrying through the grant of new leases prior to 1st April. However the elephant in the room is the PCA and the total lack of progress in the confirmation of the direction of MRO deliverance.
WHAT IS THE LIKELIHOOD OF A DOWN-GRADED EPC?
As a volume driven industry EPC Assessment was initially very much under regulated with depressed fees and work volumes resulting in a lack of accuracy or focus. Not to forget that the earliest EPCs that were undertaken in 2008 were on the back of the energy performance of Building Regulations 2007. Those ten years seem to have passed with horrifying speed and the Building Regulations constantly updated.
However the industry has matured and current assessments are much more closely regulated with the associated software used in the production of EPCs linked with the Building Regulations (Part L.). This has tightened up compliance to make it much harder to achieve the minimum E rating. It is highly likely that even the reassessment of a property rated D in, say, 2012 could easily produce a lower rating and drop into the non-compliance bracket.
IS YOUR PROPERTY A LIKELY CANDIDATE?
Recent Industry statistics have indicated that 65% of commercial EPCs are rated at D or lower. It is understood that almost 230,000 D and E-rated properties could easily be downgraded to either F or G. This of course applies to all types of commercial property, not just leisure/pub related uses.
WHAT HAPPENS NEXT?
If a commercial property is EPC re-rated as sub-standard it is the Landlords responsibility to effect all of the associated repairs. This will have a knock-on effect either with leaving properties vacant or spending the money with repercussions on periods of down-trading while the work is being undertaken.
The knock-on effect for property advisers which pulls in Surveyors, Valuers, Solicitors, Trade Advisers stand to face Professional Indemnity insurance claims for sub-standard buildings becoming un-lettable.
There is even a knock-on effect with sources of acquisition finance if the MEES Regulations do not receive full compliance.
BACK TO MRO
With the MEES Regulations coming into effect on the 1st April 2018, it seems quite remarkable that Landlords contemplating the grant of new leases or lease extensions are not building in new EPC surveys on the back of Dilapidations requirements. Put simply, if a commercial building, i.e., pub, restaurant, nightclub, hotel or similar is let after the 1st April 2018 it has to be MEES compliant.
MRO has thrown a huge spanner in the works due to the lack of decision making by the PCA and the inevitable delays that will surely happen if the PCA finally decides that MRO deliverance should be by the route of a new five-year lease. Despite the irony that a Deed of Variation would side-step the MEES Regulations, you have the rock and the hard place inevitability that if such a recommendation were made by the PCA for the Deed of Variation route that there will be heavyweight legal appeals to try to reverse that decision.
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