MEES: What does the 1 April 2023 deadline mean for lenders?

On 1 April, the prohibition on continuing to let a non-domestic property with an EPC rating of below E (known as a sub-standard property) came into force. If a landlord is continuing to let such a property, and has not registered an exemption on the PRS Exemptions Register, they could be liable to a fine of up to £150,000 plus ‘naming and shaming’. But what does this mean for lenders?

If the borrower is a landlord, MEES will impact on the lender. The value of the property will be reduced if it is not up to the required standard and cannot be lawfully let. This will also remove the borrower landlord’s income and make it more likely that they will default on loan repayments. The lender will also be directly affected if the borrower landlord defaults on their loan and the lender takes possession of the property.

What should a landlord of a property with an EPC rating of below E do?

The landlord will either need to carry out energy improvement works, to bring the EPC rating up to at least an E rating, or register an exemption. As it is now unlawful to both grant new tenancies of sub-standard properties, and continue to let them, any lettings of sub-standard properties are already susceptible to penalty notices. Swift action is, therefore, imperative as fines increase with the passage of time.

Is there any limit to the amount landlords need to spend on energy improvement works?

Works which come within the definition of ‘relevant energy efficiency improvement’ must be carried out. That means that:

• they are listed in the Schedule to the Green Deal (Qualifying Energy Improvements) Order 2012 or Table 6 of the Building Regulations Approved Document L28; and
• have been identified as a recommended improvement for that property in a green deal report, a recommendation report, or a report prepared by a surveyor.
  To be ‘relevant energy efficiency improvements’ they must also satisfy the 7 year payback test.
  If a landlord undertakes all relevant energy efficiency improvements, and the property is still rated below E, they can continue to let it provided that the landlord has registered an exemption on the PRS Exemptions Register.

Does the legislation give a landlord a right to enter a tenanted property to carry out works?

No, the legislation does not give an automatic right of entry to landlords to carry out energy improvement works. Whether or not a landlord has such a right will depend on the drafting of the lease. Where there is no such right, the tenant’s consent will need to be obtained. If the tenant will not give consent, the landlord may be able to register a ‘consent exemption’.

What happens if a landlord buys a property with an EPC rating of below E, which is subject to tenancies?

The landlord can register a temporary exemption. This exemption lasts for six months, and is designed to enable the purchaser to get the property up to the required standard, or register a longer-term exemption.

What other exemptions are available?

• Devaluation exemption: If a report sets out that the installation of specific energy efficiency measures would reduce the market value of the property, or the building of which it forms part, by more than 5%, the landlord could benefit from this exemption.

• In addition to the temporary exemption for purchasers of tenanted sub-standard properties, there are other circumstances in which a temporary exemption could be relied on - for example, on a lease renewal.

How long do the exemptions last?

The temporary exemptions last for six months. Other exemptions will generally last for five years. However:

• If the landlord has relied on a consent exemption on the basis that a tenant won’t grant access to carry out works, this exemption falls away when that tenant leaves the property.

• Exemptions are not transferable, so if a landlord buys a property against which an exemption has been registered, they cannot take the benefit of it. They would have to register their own exemption.

If the landlord gets the property up to an E rating, will they have any further obligations around energy improvement works?

It is likely that standards will rise. We are awaiting a response to the 2021 consultation, which proposed raising the minimum standard for non-domestic properties to C in 2027, followed by B in 2030. It is also possible that in-use energy ratings will become mandatory for some properties.

TLT has extensive experience in advising on the implications of the MEES Regulations. If you would like to discuss, please get in touch.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.