03 Apr 2018

MEEStery solved?

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On 1 April 2018 the MEES Regulations kicked in, prohibiting lettings of sub-standard properties. But what if your tenant wants to do the required improvement works after the lease is granted?

A common scenario

You're a commercial property manager. You've got a mixed portfolio and in the mix are a couple of run down properties that are clearly F rated. You're well aware that the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the "Regulations") prohibit lettings of "sub-standard" commercial properties (i.e. those with EPC F or G ratings) from 1 April. With that in mind, you've long planned to do substantial works to improve the EPC rating.

…the catch…

The property is being marketed, so that it can be let once the works have been done.

More quickly than you expected, a good quality tenant comes forward and is keen to take a ten year lease of the space. The tenant intends to carry out substantial works to adapt the property to its requirements and asks you not to carry out all of your proposed works as they would get in the way and would then need to be removed. Great, you say, that avoids waste and cost. But wait. In the normal way, you want to grant the lease once your works are complete, but at that point the property would still only have an F rating. Does that mean you can't grant the lease when you want to? Do you have to carry out unneeded works just to satisfy the Regulations or delay granting the lease until the tenant's works are complete?

Exemptions

Fortunately not.

The Regulations provide a number of exemptions, which mean that the ban on letting sub-standard property won't always apply. The relevant exemption here is the "temporary exemption" under Regulation 33 (2) (a), which applies when a lease is granted under a contractual obligation. Provided that you grant the lease to the tenant pursuant to an agreement for lease then you won't be in breach of the Regulations.

The "temporary exemption period" only lasts for 6 months. Does this mean that the tenant must carry out the required energy efficiency works within that time frame? No. Whilst that might be a sensible requirement that isn't what the Regulations actually require. The Regulations only say that a landlord may not grant a new tenancy after that 6 month period (unless the property is no longer sub-standard or another exemption was lodged). The landlord won't be "granting" a new lease after the expiry of 6 months (the lease will simply continue to run) so it doesn't have any immediate concern about when the energy efficiency works are actually carried out.

Of course, if the works have not been carried out by 2023 the problem would arise again, because then a landlord cannot let or continue to let a substandard property, but it's almost inconceivable that the works wouldn't have been completed by that time (and the agreement for lease should oblige the tenant to complete the relevant works well within that time frame).

Surprising?

It may seem surprising that there is an exemption for any lease granted pursuant to a contractual obligation, as this would seem to create a loophole. You would have thought that the Regulations might have limited the position to any contract entered into before 1 April 2018. Interestingly though, the guidance notes produced by the government explaining how the Regulations apply state that Regulation 33 (2) (a) is "intended to cover a situation where a contract was entered into on a contingent basis, regardless of whether it was entered into before or after the Regulations came into force". The use of the word "contingent" here is interesting but imprecise – it is likely that it is intended to refer to a contingency triggered by the satisfaction of a substantial condition. However, the Regulations themselves do not mention the word "contingent", and all that is needed to comply with the express terms of the Regulations is to show that the lease was granted pursuant to a contractual obligation.

Register

Don't forget though, if you want to rely on the exemption, you must register the exemption to qualify for it. The required registration should be made on the "PRS Exemptions Register" maintained by the government.

Solutions

The new Regulations and exemptions are detailed, but often it is possible to provide practical solutions, as illustrated by the example above. A lot will turn of the specific facts of each case, but we know the Regulations inside out and if you do have questions on how the Regulations apply or how relief through an exemption might be obtained, we'd be delighted to help.

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