In the second article of our MEES series last week – click here – we looked at a few areas to consider from both a landlord’s and a tenant’s perspective in relation to MEES in connection with commercial properties.
Those who fail to comply with MEES Regulations go to the ‘dark side’ and should fear the wrath of the ‘Storm Troopers’, – also known as the local weights and measures authority for your area, who will be enforcing compliance through either Trading Standards or Environmental Health. Penalties for breach will be based on the rateable value of the property and can be for up to £150,000 per occasion (depending on the length of the breach). The other possible penalty is being named and shamed on the PRS Register.
In this final part of our MEES feature, we will look at possible tenant covenants for inclusion in leases and things to consider when dealing with rent reviews and dilapidations.
Tenant covenants to consider in leases
Landlords may want greater control over EPCs and the EPC ratings which their properties have.
They could scrutinise a tenant’s specification of ‘proposed works’ more closely (and request the advice of a surveyor or energy management and efficiency consultant before approving certain works), and restrict tenant alterations which could adversely affect the EPC rating. They could reasonably request the tenant’s specification to be altered so that the proposed works do not adversely affect the EPC rating.
Landlords may also want to consider imposing a restriction on a tenant’s ability to obtain a new EPC. They can enforce a requirement that they obtain a draft EPC for prior approval. This gives both parties the chance to deal with remedial issues in case the draft reveals that the property is likely to fall below the minimum standard, before a final formal EPC is obtained and registered.
MEES will bring uncertainty around rent reviews.
No landlord wants the possibility of a tenant refusing a reviewed rent increase, by stating that a landlord would be unable to lawfully let the premises to someone else because it is F or G rated.
Similarly, tenants won’t want a landlord to look for a higher rent because the relevant improvements must be ‘assumed’ to have been carried, if they have not actually been carried out.
Landlords may also want to think about introducing a disregard of the effect on the rent of any lower EPC rating, or of the adverse effect on the EPC rating as a result of any works carried out by the tenant.
Landlords may wish to contemplate the possibility that rents may be depressed if:
- the tenant may well have to carry out improvement works before it can sublet;
- comparable properties have a higher EPC rating,
- the premises are subject to potentially higher service charges
What is the effect on terminal dilapidations? A building which has an F or G rating will not generally be in disrepair based on that fact alone. For example, energy inefficient lighting in an office may contribute or result in the premises having a low EPC rating, but if they are in an acceptable state of repair, the tenant will have complied with its repairing obligations, and no further works can be required.
Remember, a covenant to comply with statutes and regulations will not generally oblige a tenant to carry out energy efficiency improvement works. Therefore, it is unlikely for landlords to be able to compel a tenant to carry out energy efficiency improvement works just because the premises have an EPC rating below E. Even if an item in the premises falls into such a state as to require replacement, the tenant is not legally required to install a better, more energy efficient replacement item.
Yes, the way ahead is indeed full of challenges. “May the Force stay with you.”