Key takeaways

• Letting standards are changing. Minimum Energy Efficiency Standards (MEES) have moved from a compliance afterthought to a central asset management issue for landlords letting property in England and Wales.
  • The current minimum is an Energy Performance Certificate (EPC) of E. A landlord generally cannot grant or continue a letting of a "substandard" (EPC F or G) property unless the landlord improves it to E, or a valid exemption is registered.
  • Commercial buildings have different minimum requirements based on their size. The Government intends to implement a policy requiring all commercial properties over 1,000 square meters to achieve an EPC rating of B by 2031. It has dropped the interim EPC C milestone previously proposed for 2027. Smaller commercial buildings (under 1,000 square meters) stay at EPC E for now, with no deadline to go further.
  • Residential follows a separate track. The Warm Homes Plan targets EPC C for privately rented homes by October 2030. 
  • Additional guidelines are coming. The Government must still pass secondary legislation to implement the commercial B standard.
  • Penalties differ per property type. Fines can reach £150,000 per commercial breach, compared with a £5,000 cap per domestic property. 
• Whether the Government should increase penalties;
• Whether shell-and-core lettings get a six-month exemption; and 
• Whether tenants should have statutory duties not to undermine an EPC rating
• The immediate step is to audit EPC ratings across the portfolio and identify assets needing work to reach EPC B by 2031.
• Cost recovery is a key concern. Landlords should not assume that they can pass improvement costs through the service charge, and must negotiate clear cost-recovery provisions when granting new leases.
• Landlords should also review leases for adequate rights of access to carry out works, as parties rarely drafted older leases with sustainability upgrades in mind.
• Landlords should note that exemptions are personal, generally last five years and do not run with the land, so a buyer must re-register or carry out works.
• Where a landlord takes a property back to carry out major works, it will become liable for business rates that tenants would usually pay. However, landlords can apply for empty property relief and, following the decision in Newbigin (Valuation Officer) v SJ & J Monk [2017],¹ seek the reduction of the property’s rateable value to a nominal amount while it is undergoing redevelopment.
• At present, MEES obligations fall on the landlord, and the lease parties must allocate costs between them, though the Government is considering imposing basic duties on tenants not to undermine an EPC rating.
• Commercial tenants could use a poor rating as negotiating leverage, pressing for a lower rent or for the landlord to fund the recommendations in the EPC report.
• On exit, MEES can strengthen a tenant's dilapidations position, particularly if a landlord must carry out energy upgrades to re-let a poorly rated building.
• Local authorities enforce commercial MEES. A landlord faces a maximum £5,000 fine for failing to comply with a compliance notice or for registering false information, but the substantive MEES penalties reach far higher, up to £150,000 per breach.
• In practise, the penalty scales with the length of breach. For a breach under three months, the higher of £5,000 or 10 percent of rateable value (capped at £50,000); for over three months, the higher of £10,000 or 20 percent of rateable value (capped at £150,000).
• Authorities can publish details of breaches on the public register and can pursue former landlords for prior breaches going back 18 months.
• Residential penalties are much lower, with a total cap of £5,000 per property; up to £2,000 for letting a non-compliant property for under three months; up to £4,000 for three months or more; up to £1,000 for false information and up to £2,000 for failing to comply with a compliance notice, with the possibility of authorities publishing the breach.