151: Exemptions from compliance with minimum energy efficiency standards in relation to commercial property

On 1 April 2018 the minimum energy efficiency standards (MEES) came into force. The effect of the MEES regulations is that landlords are not permitted to grant tenancies of properties with an energy performance rating of lower than ‘E’, as certified by an energy performance certificate (EPC).

There are a number exemptions set out in the MEES regulations which may be claimed by landlords of properties that do not have the minimum energy performance rating. In order to benefit from these exemptions, a landlord must first register online on the private rented sector register (known as the PRS register).

The PRS register requires landlords register their details and details of the exemptions which they are claiming. Landlords seeking to sell a property for which they have claimed MEES exemptions should be aware that the benefit of those exemptions will not benefit their successors in title to the property.

Below are the exemptions which are most likely to arise in practice.

Exemption 1 – Recently becoming a landlord

This gives landlords a six month exemption from complying with the MEES regulations and applies where the landlord has recently become a landlord of a property for any of the following reasons:

• the grant of a tenancy pursuant to a contractual obligation on a contingent basis (for example a conditional agreement for lease or sale contract). The exemption applies whether exchange of contracts took place before or after the regulations came into force;
• if the tenant of an intermediate lease (ie a lease which is subject to a further occupational tenancy) becomes insolvent and that tenant’s guarantor takes a new lease of the premises pursuant to an obligation to do so in a guarantee;
• where a former tenant who has entered into an authorised guarantee agreement on the assignment of a lease exercises its right under the Landlord and Tenant (Covenants) Act 1995 to take an overriding lease of the lease which it has earlier assigned;
• where a new lease is granted under the Landlord and Tenant Act 1954;
• where a new lease is granted by a court order, other than under the Landlord and Tenant Act 1954; and
• where a new lease is deemed created by operation of law.

Exemption 2 – Where all relevant works have been done but the property remains sub-standard

This exemption applies where a landlord has carried out the improvement measures specified in a recommendation report (which typically accompany an EPC) or a surveyors report and the property still does not meet the minimum energy efficiency standard.  Landlords are entitled to claim this exemption only if they have carried out the works listed in the report.

The exemption applies for five years, after which a landlord would either need to make another attempt to carry out improvement works, or claim another exemption.

Exemption 3 – Third consent party consent exemption

This exemption applies where a landlord has not been able to obtain the consent of a third party to implement the necessary energy improvement measures despite using reasonable efforts to do so. The MEES guidance suggests that ‘reasonable efforts’ would involve making attempts for consent on a number of separate occasions and using a number of different available means of communication.

Examples of third party consents which may be required to implement the relevant improvement measures include the following:

• landlord’s consent;
• planning / listed building consent;
• mortgagee consent; and
• tenant consent.

This exemption lasts for five years, unless the consent required is a tenant’s consent, in which case it lasts until current tenancy ends.

Exemption 4 – Property devaluation exemption

To claim this exemption a landlord would need to obtain a report from a RICS qualified surveyor confirming that the implementation of the improvement measures would result in the reduction of the value of the property (or the building or which the property forms part) by 5% or higher.

This exemption lasts for five years.

Exemption 5 –Seven year payback test

To claim this exemption a landlord would need to be able to show that the value of savings on energy bills that the energy improvement measures are expected to achieve over a period of seven years (starting with the date of installation) are lower than the cost of implementing the energy improvement measures.

To determine whether or not this exemption will apply a landlord must follow a complex methodology, which is provided in the MEES guidance. The guidance recommends appointing an accredited energy assessor to apply the methodology.