MEES: the important distinctions

Kate Symons examines the scope of the MEES regulations for residential property and guides readers through the key differences with the commercial property provisions While many of the key principles of MEES that are applicable to commercial properties will also apply to residential properties (referred to in MEES as “domestic private rented property”) there are some important differences including implementation dates, the types of residential tenancies that will be within the scope of MEES and the nature of the exemptions available to residential property owners. Earlier dates for implementation of MEES The MEES restrictions on the grant of new lettings of substandard property (currently property with an EPC rating of below E) will apply to both residential and commercial property from April 2018. However, for reasons that are not entirely clear, the MEES restriction on continuing to let existing substandard residential property will apply from April 2020, a full three years ahead of the application of the same restriction for commercial property.  Residential properties outside the scope of MEES A property will fall within the scope of MEES only if it has a current EPC. A limited number of residential property types such as temporary accommodation, residential buildings intended to be used fewer than four months of the year and small standalone buildings do not require an EPC when sold or let and will therefore fall outside of the scope of MEES. Listed buildings may also fall within this exclusion in certain circumstances, but considerable uncertainty remains on this point (see p70). Properties that do not have a current EPC, perhaps because they have not been sold or let in the past 10 years, will also be outside the scope of MEES until such time as an EPC is obtained. Residential properties within the scope of MEES A residential property will potentially fall within the scope of MEES if it has a current EPC, or is within a larger property that is required to have an EPC. Non-self-contained units such as bedsits (which do not require an individual EPC) may therefore fall within MEES if they are within a larger building that does require an EPC. Paragraph 9 of chapter 1 of the Guidance reads: “There is no obligation to obtain an EPC on a letting of an individual non self-contained unit within a property such as a bedsit or a room in an HMO. However the property in which the unit is situated may already have its own EPC covering that property as a whole. If a property as a whole has a valid EPC and that EPC shows an energy efficiency rating of F or G, then the owner/landlord will not, from April 2018, be able to issue new tenancies for non self-contained units within the property until steps are taken to comply with the Regulations.” MEES will, however, apply only to residential property that is “domestic private rented property” defined as property let under an assured tenancy, regulated tenancy or certain forms of agricultural tenancy but excluding low-cost rental accommodation where the landlord is a private registered provider of social housing, low-cost home ownership accommodation and lettings by bodies registered as a social landlord. While a large number of residential properties are let on the basis of an assured shorthold tenancy (which is a form of assured tenancy) and will therefore fall within the scope of MEES, a significant proportion of residential lettings are granted on terms that do not satisfy the requirements for an assured tenancy given that an assured tenancy must be granted to an individual (not a company), must be let at an annual rent of less than £100,000 but more than £1,000 (within London) or £250 (outside of London) and must be used as the tenant’s principal main residence. To add an additional layer of potential confusion, it is quite possible for a tenancy to move in and out of assured status, and therefore also the scope of MEES, depending on whether these requirements are met during the tenancy. MEES will apply not only to new lettings and sublettings but also lease renewals and extensions including the creation of a statutory periodic tenancy following the ending of a fixed-term assured tenancy and any new assured tenancy created by succession where a family member takes over a Rent Act protected tenancy. Unlike the regulations applicable to commercial property, there is no upper or lower limit on the length of term of a residential property that will fall within the scope of MEES. It is therefore possible for a residential letting granted for a significant premium and for a significant term, say 125 years, to fall within the definition of an assured tenancy and therefore be within the scope of MEES. Multi-let properties Multi-let residential properties and residential properties within a mixed-use building may present particular problems given the potential for there to be multiple EPCs covering various parts of the building, each providing varying EPC ratings. In this situation, the landlord will need to identify which EPC relates to the property that is subject to the relevant tenancy and take action to improve the energy efficiency rating to the minimum standard, if necessary. A transaction relating to the whole of the building will be treated as a commercial letting for the purpose of MEES (even if all units are residential as it is not a single dwelling) whereas a lease of a self-contained flat within the building will be treated as a residential letting (assuming that it is let as an assured tenancy) and the relevant EPC will be the EPC (if any) for that flat. However, if there is no EPC for the flat, the relevant EPC may be the EPC (if any) obtained for the building as a whole. Paragraph 34 of chapter 1 of the Guidance reads: “In many cases the distinction between the commercial and the residential units will be clear; however, there may be instances where a mixed-use property is let as a single unit. Where such a property falls below an EPC rating of E, the landlord will need to examine the tenancy to determine whether the property is domestic or non-domestic for the purposes of the Regulations, and whether it is required to comply with the minimum standard, and if so, by which trigger date.” Required improvements and the “no cost” principle A landlord of a substandard residential property will not be able to grant a new lease of the property after April 2018, or continue to let the property under an existing lease after April 2020, unless it can illustrate that it has carried out all “relevant” energy efficiency improvement works to improve the EPC to an E rating or above, or that an appropriate exemption applies. Energy efficiency improvement works to a residential property will be deemed to be “relevant” only if funding is available to cover the full cost of purchasing and installing such improvements at “no cost” to the landlord. This may be achieved by way of a Green Deal finance plan, the Energy Company Obligation or a local authority grant (or a combination of such sources). There are currently a limited number of Green Deal providers in the market. Under a Green Deal plan, a property owner may undertake specified energy improvements with the energy supplier recovering the cost of the improvements by way of repayments charged to the energy bill payer (in the case of let property, usually the tenant) on a “pay as you save” basis. The repayments, payable in addition to the standard energy supply costs, will be secured by a Green Deal charge that will attach to the property with a mechanism for owners to pass the charge on to future occupants of the property, who will in turn benefit from the improvements and reduced energy bills. The amount that can be financed by a Green Deal plan will be limited by the “golden rule” (whereby the first year’s repayment must not exceed the estimated first-year saving and the overall repayment period must not exceed the lifetime of the measures installed). If the landlord of a residential property is not able to access relevant “no cost” funding to fully cover the cost of purchasing and installing the required improvements, it may apply for and register a “no cost” exemption from MEES.  Any application for a “no cost” exemption from MEES may still require the applicant to incur time and resources researching the various forms of Green Deal and other finance available. The exemption must be registered, may not be transferred to a subsequent owner and will be valid for five years, after which time a further exemption must be applied for. The guidance on MEES in relation to residential properties is available to view on the GOV.UK website. Kate Symons is a senior associate at Boodle Hatfield LLP Photo credit: sopix/REX/Shutterstock