A recent talk regarding the Energy Act 2011 and the introduction of the concept of Minimum Energy Performance Standards (MEPS) which have to be brought in by April 2018, at the latest. MEPS will affect private landlords of both commercial and residential properties. This talk focusses on the impact on commercial landlords.

1. PROPERTY
Energy Act 2011- more grey than green
There has been much speculation about how the great expectations of the Energy Act 2011
will be brought into practice. The Act introduces the concept of Minimum Energy
Performance Standards (MEPS) which have to be brought in by April 2018, at the latest.
MEPS will affect private landlords of both commercial and residential properties, although
this talk focusses on the impact on commercial landlords. The Act will make it illegal for
properties to be let unless they have an EPC energy rating of a specified grade, yet to be
determined.
The Department of Energy and Climate Change has now published its responses to its
consultation on the introduction of MEPs and so finally, subject to Parliamentary approval,
we will know what our landlord and tenant clients will have to tackle.
There will be some exemptions to the MEP requirements, the main examples being leases
granted for a term of less than 6 months or more than 99 years and listed buildings. Certain
types of building will also be exempt e.g. places of worship. As set out below, there are also
some more fact sensitive exemptions that a landlord may be able to rely upon.
Enforcement of the minimum standards will be dealt with by the local trading standards
office and the punishment will be a penalty fine. Failure to comply with a compliance notice
will result in a fine of £5000 and there will be a register of those buildings that are not
compliant. The fine for leasing a non-compliant property will be based on the rateable value
of the property; non-compliance for less than 3 months will result in a fine of 10% of the
rateable value subject to a minimum fine of £5,000 and a maximum of £50,000. Where there
has been compliance for more than 3 months, the fine will increase to 20% of the rateable
value with a minimum fine of £10,000 and a maximum of £150,000. In addition to a fine, the
property will be put on a register and the landlord be served with an energy efficiency
improvement notice requiring works to be undertaken within six months, failing which
further enforcement action could be taken. It is not clear at this time what the limitation will
be; there is no 6 month time limit as exists for the current EPC scheme.
Although we are still waiting for final Parliamentary approval, the consultation document
and the responses give us clear guidance and the minimum standard will almost certainly
be an ‘E’ rating. The draft regulations have now been provided which provide much needed
clarity.
There was industry wide concern that there would be no ‘soft start’ to the Act and that
landlords would have to put in hand the necessary upgrading works prior to April 2018 to
Background
Minimum Standards

2. ensure that existing lettings would not become illegal part way through the term (leaving the
landlord at risk of enforcement measures).
Given the draft documentation, it is almost certain that only new lettings will be caught by
the MESPS at the April 2018 date and that the hard start date will be 1 April 2023 at which
time all commercial premises, even those where leases are in place which were granted
before April 2018, will be caught by the Act.
It is, therefore, important that landlords review their portfolios now to determine which of
their properties, with EPC ratings of F or G, will need either a new lease to be granted after
April 2018, or will have an existing lease continuing beyond 1 April 2023. In addition,
landlords with ‘borderline’ E ratings should consider the accuracy of those results.
It is important to note that the regulations also extend to buildings which are let on a ‘shell’
basis as the onus is on the landlord to ensure that the fit out works undertaken by the tenant
meet the MEPS. This can be dealt with in the agreement for lease, but the landlord should
ensure that an EPC is obtained on completion of the works and that the MEPS has been met.
If it has not, the landlord must require the tenant to carry out whatever further works are
necessary.
Once properties at risk have been identified, landlords would be well advised to consult with
their building surveyors with a view to putting in hand a programme of works to spread the
cost of works. Landlords may also benefit from talking to an accountant, or other specialist
about tax reliefs, grants and funding that may available for the works to be undertaken.
In addition to the exemption above, it is likely that there will be a limited number of other
exemptions.
It is important for a landlord to determine the total cost of the necessary works because
that, in itself, may allow the landlord to exempt itself from the Act. The golden rule of the Act
Is that the cost of the works should not outweigh the total energy savings and should not
result in a net material decrease in the property’s value.
It is, of course, no mean feat to determine what the total energy savings will be and, at this
stage, there is no real guidance. However, it is clear that the Government is trying to limit
the exemptions as far as possible so any landlord wishing to rely on such calculations will
need clear evidence.
The landlord may also be able to exempt itself from the Act if it cannot raise the up-front
costs, either privately, or through the Green Deal funding mechanism or other grant funding.
Again, the Government is keen to avoid people relying on this excuse so a clear audit trail
will be required if the exemption is to be relied upon.
Finally, a landlord may not be required to carry out the works if the works required
necessitate wall insulation and this will cause damage to the building. This may, in fact only
exempt the landlord from carrying out part of the works and this will be determined on a
building specific basis.
Exemptions

3. It will be for the enforcement officer to decide whether the landlord can fall within the
claimed exemption.
1. Can the tenant be required to undertake the works necessary to bring the property
up to the minimum standard pursuant to the standard ‘compliance with statutory
obligations’ clause?
- The general consensus is that the Energy Act doesn’t oblige anyone to carry out
works, it simply prevents a letting until such works are done.
- The onus is very much on the landlord and it is likely that it will be the landlord’s
responsibility unless the tenant has entered into an express contractual
obligation in the lease to carry out such works as may be required for the
building to meet the MESP.
2. Can the tenant be required to undertake the works necessary to bring the property
up to the minimum standard pursuant to a normal repair clause?
- Although it is a lawyer’s answer, there is no straight forward yes or no to this
question.
- The drafting of the clause will clearly be crucial as the tenant’s liability is defined
by the wording of the clause, but, assuming it is a standard ‘keep in good repair’
clause, the question becomes whether the works to be carried out are works of
repair, or not.
- A good example is a boiler that is in disrepair because it is no longer working
properly and, under the terms of the lease, would need to be put back into good
working order. If those repair works necessitate replacement of the boiler this
may have the result of improving the EPC rating, but it does not follow that the
tenant must replace the boiler with one that would improve the EPC rating.
- It is very unusual for a tenant to be obligated to carry out improvement works
and, therefore, where the works required to bring the property up to the
minimum standard are solely improvement works, the tenant will not normally
be liable to undertake such works.
- In reality, the works required to comply with the MEPS are likely to involve both
repair works and improvement works and it will be for the surveyors to argue
over the distinction and liability. Careful thought should be given when drafting
schedules of dilapidations to see if any energy efficiency works can be included. If
Impact on existing leases where the property has a rating of F or G

4. such works can potentially be included as they amount to repair works, landlords
may be advised, if the lease allows, to serve an interim schedule of dilapidations
to ensure the works are carried out before the end of the lease (to avoid a letting
void) or during the term if the term extends beyond 2023.
- When acting for tenants going forward, the best way to protect them from the
potential for significant EPC related works would be to limit their repairing
obligation by reference to a schedule of condition. Better still, agree an express
term that the tenant will not be liable for any energy efficiency improvements,
although our view is that few landlords will be willing to agree to such a term.
3. Can the landlord carry out the necessary improvement works during the term of an
existing lease to ensure that it is not in breach?
- The ability to carry out such works will be vital where the lease of a property with
an F or G rating has a term which will continue beyond 2023, or has a term which
expires before 2018. In these circumstances, if the landlord is unable to carry out
the works whilst the tenant is in situ, it will either face a fine for being in breach
of the Act, or be left with a void before the property can be re-let.
- The landlord’s reserved rights are going to be critical in determining whether, or
not, the necessary works can be carried out. If the landlord cannot rely on a
reserved right, he will have to rely on the goodwill of the tenant and landlords
may consider a small rent free period will be justified to obtain tenant agreement
if this is likely to be cheaper than a void or fine.
- When negotiating or drafting new leases where this may be an issue, it is
important to ensure that specific (and perhaps expanded) rights are reserved to
allow the works to be carried out.
4. Can the landlord recover the cost of the necessary works from the tenant through
the service charge?
- Again, the drafting of the clause will dictate whether the costs can be recovered.
If the works are works of repair, the cost will likely be recoverable through the
service charge, but, unless the service charge specifically allows, costs of
improvement works would not normally be recoverable from the tenant.
- As above, what is an improvement and what is a repair is likely to be a grey area
and it may be that part of the costs are recoverable rather than the whole of the
costs. The landlord may be able to rely on arguments that energy bills will be
reduced to try and assist with recovery.

5. - With new leases, if it is anticipated that such works will be required during the
term, landlords should seek to negotiate the ability to recover all of the costs and
drafting must be specific to ensure the tenant cannot try to avoid liability. Where
wording is vague, the tenant is often given the benefit of the doubt on the
question of interpretation.
5. Sub-letting
- A request to sub-let after 2018 may be advantageous for a landlord. The Act
restricts sub-lettings as well and, therefore, if a tenant of a property which has
an F or G rating wishes to sub-let, it will first need to bring the property up to the
required standard.
- If the property is not in disrepair, it cannot require the landlord to carry out the
required works. The tenant then has two options; pay for the works itself (and
obtain the necessary consents to do so which the landlord will likely be happy to
give), or effectively lose the ability to sub-let.
- Landlords should recognise this as an opportunity, and where tenants are not
prepared to proceed with the sub-letting because of the cost of the necessary
works, landlords who otherwise may be unable to recover any of the costs of
such works, may seek to negotiate with the tenant so that the cost is shared.
- We should be alert to this when we are approached by landlord clients who have
received a request to sub-let. Such negotiations should really take place before
drafting of any licence to sub-let commences.
6. Other advice to Landlords
- Consider property stock and review lease expiry and removal dates.
- Re-test those parts of your property portfolio which are below an ‘E’ rating or
borderline.
- Consider requests to sub-let and licences for works in more detail as these could
present opportunities for upgrading properties.
- Consider EPC ratings more carefully on new acquisitions.
- Beware of lender obligations in funding offers.

6. - We have an opportunity to get ahead of the pack and offer our clients some of
that famous ‘added value’. We should be identifying clients with properties that
may be at risk when the Act comes into force and discussing with them how they
can keep their liabilities to a minimum.
- Proactive attention is recommended and consideration should also be given as to
whether any works should improve your stock beyond an ‘E’ rating as the cost of
those works could be relatively modest and future proof your stock from later
changes in regulations
- When we are acting in respect of any property with an F or G rating and the new
lease will go beyond 2023, or will come to an end in early 2018, we should be
negotiating terms to protect our client from the issues discussed above.
For more information about any of the issues above or for advice on a contentious property
issue please contact either Keith Biggs or Charlotte Price on 01392 823811 or on
keith.biggs@otbeveling.com or charlotte.price@otbeveling.com
Conclusion