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Business Property Leases and Minimum Energy Efficiency Standards

10 January 2020

Ki Lee

The government recently started a consultation on the Minimum Energy Efficiency Standards (MEES) in respect of non-domestic privately rented properties, with the aim of reducing carbon footprint by at least 20% by 2030 (which is line with the government’s ambition of achieving net zero carbon emission by 2050).  In order to analyse what this means for landlords and tenants of business leases, let’s first revisit the regulations that came into force in April 2018. 

 

The Minimum Energy Efficiency Standards was introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. It applies to both residential and non-residential properties.

 

As of April 2018, it is unlawful for a landlord of a residential and commercial property to grant a new lease if that property has an EPC rating of E or below.

For existing leases:

•    From 1 April 2020 it will be unlawful for a landlord to continue to lease a residential property if that property does not meet the minimum standard.

•    From 1 April 2023 it will be unlawful for a landlord to continue to lease a commercial property if that property does not meet the minimum standard.

 

A landlord in breach of the law could face a fine of up to £5,000 (residential property) or up to £150,000 (commercial property) per breach.

 

There are some exemptions from the regulations and these include: properties that do not require an EPC such as a listed or protected building, if consent cannot be obtained to carry out the improvement work, or if the improvement work would devalue the property by more than 5%.

 

The current proposal from the consultation is to set a minimum standard of a B rating for all non-domestic privately rented properties by 2030. How will this affect landlords and tenants of business leases?

 

The regulations place the responsibility on the landlord and it looks like this will remain to be the case. However, this is only a starting point and the contractual relationship between the landlord and the tenant under the lease needs to be looked at.

For existing leases where the property is sub-standard (EPC rating of E or below), it is not too early for the landlord to think about improving the energy efficiency of the property (they have until 1 April 2023 to do so). It would be a good opportunity to go a step further and increase the energy efficiency to more than the minimum standard if it is cost effective to do so.

 

For existing leases where the property is already compliant, it would be wise for both landlords and tenants to review their respective covenants in their lease to help understand any future responsibility for improvement work.

 

For new leases, both parties should bear in mind the regulations and the recent proposal when negotiating the terms. The responsibility for improvement work needs to be addressed and clearly defined in the lease to avoid potential future dispute.

There will always be the contention that the tenant will argue energy improvement work is the landlord’s responsibility as they own the property whereas the landlord will argue it is the tenant’s responsibility as they are the occupier and will benefit from the work.

 

As the regulations also apply to sub-letting, tenants cannot grant a sub-lease of a property that is below standard unless improvement work is carried out to bring the property to the minimum standard or an exemption applies.

 

It is worth noting that the government is keen to implement cost-effective  measures and with the advancement of green technology, a jump from the current minimum E rating to a B rating may become easier and cheaper to achieve in the course of the next 10 years. 

 

If you require advice in relation to your business lease, please contact the property department at 3CS Corporate Solicitors.

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