On 1 April 2023 it will become unlawful to continue to let commercial properties with an Energy Performance Certificate (EPC) rating of lower than E, bringing them into line with domestic properties, where this has been the case since 1 April 2020. This, coupled with the rising cost of energy, makes it timely to revisit the application of the Minimum Energy Efficiency Standards (MEES) to rural estates, where buildings and dwellings may typically be older and harder to bring up to the required minimum standard.
What is within the scope of MEES?
To recap, MEES relies on the EPC regime, which predates it and was brought in to improve market awareness of energy (in)efficiency and cost. In brief:
- MEES applies to all privately rented properties in England and Wales which are legally required to have an EPC and which are let on a relevant tenancy type, be that domestic or non-domestic. Where buildings are exempt from needing EPCs, such as low energy use agricultural buildings, they also fall outside the scope of MEES.
- Domestic private rented properties include dwellings let on an assured tenancy (including assured shortholds), a regulated tenancy under the Rent Act 1977, or a domestic agricultural tenancy (such as those under the Rent (Agriculture) Act 1976).
- Non-domestic private rented properties are defined as buildings let under a qualifying tenancy (terms of less than six months and more than 99 years are excluded) and which are not a dwelling.
Where MEES applies, the rules from 1 April 2023 will be that it will be unlawful to let, or to continue letting, any domestic or non-domestic building with an EPC rating of lower than E, unless an exemption applies and is registered on the Exemptions Register. This presents a particular challenge to rural estates, which usually possess a range of traditional buildings, from old workers’ cottages to stables converted for commercial use.
MEES on the rural estate
- Listed buildings: the question of whether listed buildings are within the scope of MEES is circular and easily misunderstood. To be clear, listed buildings are not automatically exempt from the requirement to have an EPC, nor, by extension, the requirement to comply with MEES. The legislation is nuanced and states that “buildings officially protected as part of a designated environment or because of their special architectural or historical merit, in so far as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance” do not need an EPC. The qualification “in so far as” is the crux: a listed building is within the scope of MEES, and required to have an EPC, if changes could be made to it to bring it up to the required standard, but only where those changes would not unacceptably alter its character or appearance. In practice, of course, it is likely that changes such as new windows and doors would indeed unacceptably alter the character of the property. Hence the circularity. The safe position is to commission a (draft) EPC, to prove that what the EPC recommends (to make the property comply with MEES) cannot be done.
- Farmhouses: where farmhouses have been let as part of an agricultural holding after October 2008, either as part of a farm business tenancy, or on an Agricultural Holdings Act tenancy, they require an EPC. Farmhouses are not referred to in the MEES regulations, however, and this causes a problem. Referring to the definitions above, a farmhouse is not domestic private rented property (wrong type of tenancy) and it is unclear whether it is non-domestic property (depending on whether "property" means the building with the EPC, or the whole property let under the tenancy). If the former, then because a farmhouse is a dwelling, it cannot be non-domestic and so is not caught by the non-domestic MEES rules either. Although it might be tempting to try and exploit what may look like a loophole now, the more prudent position is to treat farmhouses as though they must comply with MEES. Doing so will be consistent with the overall intention of public policy and less likely to create a problem for the future.
- Sublet cottages: this at least is straightforward. Where cottages are sublet on a relevant tenancy, from within a wider agricultural tenancy, they will be within the scope of MEES. However, these are also the properties least likely to be compliant and although it is the direct landlord (here, the farm tenant), who is responsible for bringing the property up to standard, they are likely to be require the consent of the landlord under the agricultural tenancy to make the necessary alterations.
- Holiday lets: generally, EPCs are not required for furnished holiday lets (as defined by HMRC), unless the occupier is expected to meet the energy costs of the building during the period of their occupation, which is unusual. The building would also have to be let for less than 31 days to each occupier and be let as a furnished holiday let for more than four months of every year. There is an argument that the rent charged for holiday lets includes energy costs, but this not referred to in government guidance, which is otherwise clear that where the above test is met, an EPC is not required. If an EPC is not required, then MEES will not apply.
If you have non-compliant property within the scope of MEES, check whether it can be brought up to standard. If not, does an exemption apply? The maximum fine for non-compliance is £150,000 and offending landlords can also be "named and shamed" on the register.
If you are relying on an exemption, remember that they generally only last five years and relate to the landlord, not the property, so if the property changes hands, the exemption must be renewed.
- High cost (domestic properties only): landlords are not required to spend more than £3,500 (inclusive of VAT) on improvements to bring their domestic property up to standard. Where there is no single improvement that can be made for under £3,500, a "high cost" exemption can be registered. Where improvements can be made within the £3,500 cap then those must be made and, if the property still falls short of the required standard, an "all improvements made" exemption can then be registered. Three quotes are required as evidence. Remember, this includes any improvements made since 1 October 2017. Also, although a landlord can choose which improvements to make, if they make improvements not recommended by the EPC which fail to bring the property up to standard, an exemption cannot be registered.
- All improvements made: for property where all improvements have been made (up to the £3,500 cap for domestic property) or there are none to be made and the property remains sub-standard, an "all improvements made" exemption can be registered. Again, three quotes are required.
- Devaluation: where you can obtain a report from an independent Royal Institute of Charters Surveyors (RICS) assessor that installation of a measure would devalue a property by more than 5 per cent, a devaluation exemption can be registered. Any recommended measures not covered by the report must still be carried out.
- Seven-year payback (non-domestic property only): if the initial cost of the measure exceeds the savings it would create on energy bills over the next seven years, then the measure will be deemed not to be a relevant energy efficiency improvement and this exemption can be used. Recent fluctuations in energy prices mean it will be extremely difficult to be accurate about predicted future savings and this test will become increasingly hard to meet.
An opportunity, not a threat
Although it is tempting to dismiss making properties MEES compliant as yet another outlay for landlords, the value (both to the occupant and the environment) of more energy efficient buildings is undeniable. It is already something that tenants and lenders are taking much more seriously, and demand for efficient dwellings and offices looks set only to grow in the future: there are proposals to raise the minimum standard to C or B by 2030. Landlords with compliant portfolios will be set fair to take advantage of this.
If you require further information about anything covered in this briefing, please contact Elizabeth Earle or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2023