The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (‘the MEES Regulations’) impose minimum energy efficiency ratings on properties that can be let out. The MEES Regulations therefore impact on Managing Trustees who let out or are considering letting out residential and non-residential properties.
The minimum energy efficiency rating currently imposed by the MEES Regulations is band “E”. This efficiency rating (where “A” is the most efficient and “G” is the least efficient) is found in the energy performance certificate (‘EPC’) landlords must generally obtain before letting/leasing property.
Although the MEES Regulations are likely to have cost implications for Managing Trustees, it is important to remember that the aim of the legislation is to reduce greenhouse gas emissions, cut energy costs and, for residential tenants specifically, to ensure that tenants who most need more efficient homes, particularly vulnerable people, are able to enjoy a better living environment and lower energy bills.
This Focus Note explains how Managing Trustees can check if the MEES Regulations apply to their property and what steps they need to take if the property’s energy efficiency rating is below the minimum standard. The MEES Regulations apply to both residential and non-residential property and this Focus Note highlights where both property types are treated differently.
Managing Trustees in Scotland
Please note that the MEES Regulations apply to properties in England and Wales only. Managing Trustees in Scotland are encouraged to refer to the guidance produced by the Scottish Government on the Scottish “Energy Efficient Scotland” programme.
The paragraph headed “What does Energy Efficient Scotland mean for private landlords?” sets out the intended deadlines by which rented (and ultimately all) properties in Scotland have to achieve minimum energy efficiency ratings initially set at “E” and progressing to “D” and “C” (under consultation) in the future. Managing Trustees will also note the guidance on the funding available in Scotland to achieve this.
Managing Trustees who enter into new lettings must check (1) whether the property needs an EPC; and if so (2) that the property has a minimum EPC rating of “E”. If the property falls short of this minimum standard, Managing Trustees need to ensure that either work is carried out to bring the property up to standard or an exemption is registered (see Sections D2 and D3).
Although a fair proportion of non-residential Methodist properties do not require an EPC e.g. buildings used for worship and (non-residential) listed buildings, Managing Trustees already have to obtain an EPC in many cases, particularly with residential properties. These EPCs need to be checked and if the energy efficiency rating is below “E”, Managing Trustees need to be aware of the impact this will have should they decide to let the property in the future and the potential impact on a sale.
Residential tenancies – what type of tenancies do the MEES Regulations apply to?
The MEES Regulations apply to the majority of types of tenancy that Managing Trustees enter into. They apply to:
C1 – Is an EPC required?
The MEES Regulations apply if the property requires an EPC and no exemptions apply. Therefore, the first step for Managing Trustees to take is to find out whether the property they are seeking to let out needs an EPC at all. If it does not then the MEES Regulations will not apply.
The most common situations when Methodist property will not require an EPC are:
- Where a property is used as a place of worship or for other religious activities (non-residential);
What about multi let buildings e.g. central halls?
In multi let buildings, such as a Methodist Central Hall where the building includes both worship space and shop units, then an EPC is required for the shop units and not the worship space. If the EPC rating for the shop unit is below an ‘E’ rating then improvements have to be made to that shop unit not the whole building. Those improvements could however have benefits for the remainder of the building.
It is also possible that an EPC could be required for a building that is no longer used as a place of worship but instead the whole building is let to a commercial tenant. In that case Managing Trustees will have to consider what the property is being let for and whether it would be cost effective to proceed with the lease if a large number of improvements were required to bring the property up to an energy efficiency rating of an ‘E’. Managing Trustees may also want to consider whether retaining some form of worship in the building alongside the letting would mean that they would not lose the exemption. Managing Trustees should discuss this with their legal advisers and/or surveyor.
- Where a property is listed or officially protected and the minimum energy performance requirements would unacceptably alter the character or appearance. (Please note that although current thinking suggests this to be the general position, Managing Trustees should obtain advice on their particular circumstances to be certain as discussed in the “Listed buildings and buildings in a conservation area” box below.)
Listed buildings and buildings in a conservation area
Managing Trustees of listed buildings and buildings in a conservation are encouraged to refer to the guidance on the Historic England website:
Commercial/ non-residential listed buildings
Residential listed buildings and buildings in a conservation area
What does it mean to “unacceptably alter” the appearance or character?
- Where a property is a temporary building with a planned time of use of 2 years or less e.g. the lease of a temporary building to a pre-school pending completion of a new classroom at a neighbouring school.
- Renewal leases.
Other examples that are less likely to be of much assistance to Managing Trustees include:
- An industrial site, workshop or non-residential agricultural building that doesn’t use much energy.
- A detached building with a total floor space under 50 square metres
- A building due to be demolished by the Managing Trustees and they have all the relevant planning and conservation consents.
C2 – Other situations where the MEES Regulations do not apply
In addition to the non-application of the MEES Regulations where the property being let does not require an EPC, the MEES Regulations will also not apply to:
- Licences to occupy granted for Methodist property;
- When a property is being sold;
- Commercial lease arrangements where the lease is granted for 6 months or less (unless the lease provides for it to be renewed after 6 months or the tenant has been in continuous occupation for more than 12 months);
- Where the lease is granted for more than 99 years (this is where leases are more akin to a freehold sale e.g. on the leasehold sale of a burial ground); or
- In residential lease arrangements where the lease is a common law tenancy as opposed to an assured or assured shorthold tenancy etc. (Although this does not currently apply to Methodist properties, the MEES Regulations will also not apply to social tenancies.)
If the MEES Regulations apply then Managing Trustees need to check the EPC to see if the property meets the minimum energy efficiency standards i.e. it is rated “E” or above.
D1. Property meets the minimum energy efficiency standards (“E” or above)
If the property meets the minimum energy efficiency standards then Managing Trustees can proceed with the letting. Please contact TMCP Legal and refer to the guidance on the Non-Residential Leases and Residential Tenancies pages on TMCP’s website for details of the steps to be taken to fulfil the charity law and Methodist law and policy requirements.
Even if the energy efficiency rating meets the minimum requirements, Managing Trustees as prudent charity trustees may want to consider the recommendations for energy improvement found in the EPC and decide whether they wish to make any improvements voluntarily. (See “Improvement Works” box.)
D2. Property does not meet the minimum energy efficiency standards (below “E”)
If the property does not meet the minimum energy efficiency standards i.e. it is rated below “E”, the Managing Trustees cannot proceed with the letting unless they carry out improvement works to meet the minimum standard or one of the exemptions applies. Managing Trustees therefore need to: (1) make the improvements recommended in the EPC; and/or (2) register an exemption (See Section D3 of this Focus Note).
Before carrying out improvement works Managing Trustees will need to consider whether the nature of the works require a project to be logged on the Property Consents Management System (Consents Website) and consider how to fund the works.
Managing Trustees can also refer to the general guidance on carrying out works on the Developments and Works page of TMCP’s website.
Improvement works can prove costly for Managing Trustees and guidance on funding is set out in Section E of this Focus Note.
Alternatively or in addition to making energy improvements, Managing Trustees should check whether an exemption applies.
D3. Exemptions to making energy improvements
There are limited exemptions that may apply to both residential and non-residential property. It is recommended that Managing Trustees refer to the Government guidance for full details on the exemptions and seek professional advice to check that any exemption they seek to rely on will apply. Managing Trustees need to bear in mind that for the exemptions to apply, they must be registered on the Private Rental Sector Exemptions Register (PRS Register) (see Section D4 of this Focus Note). The exemptions also only last for a limited time period, generally 5 years.
- Government guidance on Private Rented Sector Exemptions (Exemption Guidance)
The exemptions most likely to apply to Managing Trustees include:
(1) “7 Year Payback Exemption” – (Non-residential property only)
This exemption applies if the improvements suggested in the EPC would not pay for themselves with 7 years. This means for example that if the cost of installing a new boiler would exceed the benefit received on gas payments over 7 years or less then the improvement would not have to implemented. The test applied is set out in chapter 2 of the Government’s Non-Domestic MEES Guidance. Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 4 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect to rely on this exemption. Note that the exemption only lasts 5 years following which Managing Trustees would need to revisit whether any energy efficiency improvements can be made and carry out works at that stage and/or re-register an exemption.
(2) ”High Costs Exemption” – (Residential property only)
This is a new exemption and applies if the cost of making even the cheapest recommended improvement would exceed £3,500 inclusive of VAT. When the MEES Regulations were first introduced, a “no costs” exemption was available under which improvements only had to be made if the improvements could be undertaken at “no cost” to the landlord. Now Managing Trustees need to spend up to £3,500 on improvements (including rather than in addition to any funding they may be able to rely on). This exemption can only be relied upon if there are no improvements that can be made for £3,500.
Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 3 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. Note that the exemption only lasts 5 years following which Managing Trustees would need to revisit whether any energy efficiency improvements can be made and carry out works at that stage and/or re-register an exemption.
If following improvements up to £3,500, the energy efficiency rating is still below “E” then Managing Trustees would need to register the ‘All Improvements Made’ exemption, (see exemption (3)).
Please note that the £3,500 cap is applied to the whole package of improvements, rather than individual measures, and includes costs paid for using third-party funding, including “green deal finance”.
(3) “All Improvements Made Exemption” – (Residential and non-residential)
This applies where all “relevant energy efficiency improvements” have been made (or there are none that can be made) and the property remains sub-standard.
Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 5 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. Note that the exemption only lasts 5 years following which Managing Trustees would need to revisit whether any energy efficiency improvements can be made and carry out works at that stage and/or re-register an exemption.
(4) “Wall Insulation Exemption” (Residential and non-residential) (either cavity wall or solid wall).
This applies where cavity wall insulation, external wall insulation or internal wall insulation is not appropriate for the property due to its potential negative impact on the fabric or structure of the property. This conclusion must be based on written expert advice. In this case the recommended energy efficiency measure is not considered to be a “relevant measure”.
Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 6 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. Note that the exemption only lasts 5 years following which Managing Trustees would need to revisit whether any energy efficiency improvements can be made and carry out works at that stage and/or re-register an exemption.
(5) “Consent Exemption” - (Residential and Non-residential)
This applies where Managing Trustees require third party consent to carry out the improvements and despite reasonable endeavours Managing Trustees cannot obtain that consent. This is often where a tenant is in occupation and will not allow a landlord access to the property to undertake the work or where planning permission or building regulation approval is required e.g. solar panels or external wall insulation.
Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 7 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. This exemption can last for a period of up to 5 years. However, if the exemption is based on lack on tenant’s consent then the exemption applies only so long as the same tenant remains in the property. (Managing Trustees should note that there is a proposal to remove this exemption.)
(6) “Devaluation Exemption” - (Residential and Non-residential)
This exemption can be used where an independent RICS surveyor indicates that energy improvement works would devalue the property by more than 5%.
Please note that this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 8 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. This exemption can last for a period of 5 years following which landlords are expected to try to improve the energy efficiency again. A further exemption can be registered.
(7) “ New Landlord Exemption” - (Residential and Non-residential)
Managing Trustees should be aware that this is a temporary exemption only. It usually applies where a property has been recently acquired and there is a tenant in the property (unusual in the case of Methodist property purchases) or the Managing Trustees are obliged to grant a (non-residential) lease renewal under the Landlord and Tenant Act 1954. Note that the availability of this exemption will reduce once existing leases fall under the MEES Regulations from 1 April 2020.
As with the other exemptions, this exemption would need to be registered on the PRS Exemptions Register and refer to paragraph 9 of the Exemption Guidance for details of the evidence Managing Trustees would need to collect. This exemption, however, only lasts for a period of 6 months from the date of becoming landlord and cannot be re-registered.
D4. PRS Exemptions Register
As mentioned in Sections D2 and D3 of this Focus Note, for an exemption to apply it must be registered on the PRS Register. There are fees connected to registration as well as other costs incurred when proving that the exemption applies.
Managing Trustees also need to bear in mind that to protect themselves from enforcement action, a new exemption would have to be registered at the end of the original exemption period and that the availability of a new exemption may not be guaranteed. After the expiration of the original exemption circumstances may have changed because of advances in technology or the availability of more cost effective solutions.
Please also note that the PRS Register is publicly available.
If Managing Trustees are required to carry our energy improvement works, they are encouraged to consider their funding options.
Managing Trustees could ask the Circuit or District whether they could loan the money to them so that the works can be undertaken immediately. A repayment plan could then be negotiated as the Managing Trustees may expect to receive a higher rent if improvements have been made to a property.
There may also be alternative third party funding available such as Green Deal finance. Managing Trustees can obtain general advice and assistance on energy efficiency funding by contacting the Energy Savings Advice Service on 0300 123 1234.
Green Deal Finance
Green Deal finance is available to enable landlords to undertake and fund energy improvement works with the cost of the works being repaid in instalments by being added to the energy bill for the property. The Green Deal payments are secured by a Green Deal Charge that will attach to the property. Green Deal will only be available where the first year’s repayment does not exceed the estimated first year saving and the overall repayment period does not exceed the lifetime of the improvement measures (known as the “Golden Rule”).
The Green Deal payments will be secured by a Green Deal Charge that will attach to the property and not the owner or occupier of the property.
Managing Trustees exploring such third party finance should contact TMCP so that guidance can be given on the associated charity law and Methodist law and policy requirements.
E2 Can costs of energy improvements be passed on to tenants?
The short answer is that it is very unlikely that costs can be passed onto tenants. With existing leases it is unlikely that the cost of energy improvement works will fall under the tenant’s repairing obligation, particularly given the key word ‘improvements’ rather than repairs. It is also unlikely that a service charge will be so widely drafted that it would include recovery for such works.
With a new lease Managing Trustees could try and impose a covenant on the tenant to pay for energy improvement costs. There would of course be a benefit to the tenant, lower heating bills for example, but it is likely to be a matter for negotiation. Managing Trustees will also want new leases drafting in such a way that tenants cannot make any alterations to Methodist property that would affect the energy performance of those premises.
A lease or a letting that is granted in breach of the MEES Regulations will still be valid and legally enforceable, however, there are penalties for non-compliance. Managing Trustees also need to be aware that breach of the regulations would mean breach of the Managing Trustees’ duties as prudent charity trustees.
If Managing Trustees grant a lease or tenancy of a property that is subject to the MEES Regulations and falls short of the minimum energy efficiency standards, and they have not registered a valid exemption they may be liable to financial penalties or other enforcement action by the enforcement authorities. For residential properties this will be the Local Authority and for commercial properties the Local Weights and Measures Authority.
Penalties for commercial leases could result in fines of £10,000 or 20% of the rateable value, whichever is the higher, up to a maximum of £150,000. For residential lettings the penalty is a maximum of £4,000. Managing Trustees who let multiple properties should be aware that these fines could add up if the MEES Regulations are not adhered to.
There is also the possibility of reputational damage to a Local Church or Circuit as there is the power to be named and shamed through ‘publication penalties’.
Whilst the MEES Regulations currently only relate to new leases and lettings, existing tenants will be caught by the MEES Regulations in the future:
- From 1 April 2020 existing residential tenancies will be subject to the MEES Regulations and Managing Trustees will not be able to continue letting if the EPC Rating is less than “E” (or an exemption is registered).
- From 1 April 2023 existing non-residential leases will be caught by the MEES Regulations.
Managing Trustees will want to review the properties which they are currently proposing to lease or let and speak with their professional advisers, particularly if they are unsure if the letting will be caught by the MEES Regulations or if an exemption will apply.
It is also a good opportunity to review all properties which Local Churches, Circuits or Districts have managing trusteeship responsibility for so that Managing Trustees can, where appropriate, consider what steps can be taken before the MEES Regulations affect existing lettings and leases.
TMCP can provide Manging Trustees with guidance in conjunction with the Connexional Team and the Managing Trustees’ instructed professionals. Please feel free to contact TMCP Legal if Managing Trustees have any queries.
- Managing Trustees can also find detailed guidance from the Government website at https://www.gov.uk/government/publications/the-private-rented-property-minimum-standard-landlord-guidance-documents.
- Domestic Private Rental Property Minimum Standard Guidance
There is a useful flow chart in Appendix A on page 89 summarising the steps for Managing Trustees to take.
- Non-Domestic Private Rental Property Minimum Standard Guidance
- Historic England Guidance – Energy Performance Regulations
- If Managing Trustees are unclear of whether or not the MEES Regulations affect any proposed lettings they should speak with their solicitor, surveyor and/or letting agent.
- On letting Methodist residential property please refer to the guidance available from the Residential Tenancy page on TMCP’s website. The Residential Tenancy (Landlord) Checklist is a good place to start.
- On letting Methodist non-residential property please refer to the guidance available from the Lease page on TMCP’s website. The Non-Residential Lease (Landlord) Checklist is a good place to start.
If you have any queries in relation to the guidance in this document please contact TMCP Legal for further assistance.