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How Will The MEES Regulations Affect Agreements For Lease?

What are the MEES Regulations?
The Minimum Energy Efficiency Standard (MEES) was introduced in March 2015 by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. The MEES Regulations will come into force as of 1st April 2018.
At present commercial buildings have an energy efficiency rating between A and G. Under the MEES Regulations, as of 1st April 2018 it will be unlawful for a landlord to renew an existing tenancy or grant a new tenancy of a property with an EPC rating of below an E rating unless an exemption is registered. But how will these regulations affect properties which are sub-standard where an agreement for lease is exchanged before 1st April deadline? If completion of the lease takes place after 1st April will the landlord still have to comply with the MEES regulations?
Agreements for Lease exchanged prior to the 1st April deadline
The MEES Regulations define the relevant date to be applied as being the date of the grant of the lease, in other words completion of the lease itself, rather than exchange of an agreement for lease. Therefore no allowance is made for leases which are granted after 1st April where the agreements were exchanged before that date, the MEES Regulations will apply regardless. However it may be possible for the landlord to obtain a temporary exemption in order to make the letting lawful.
What can the Landlord do?
What can the landlord do if they are legally bound to an agreement for lease on such a property where completion will take place after the 1st April deadline?
Register an Exemption I
It is possible to register a temporary exemption which will make unlawful lettings lawful under the MEES Regulations. One such example is where a landlord is subject to a contractual obligation to grant a new lease. This would allow a landlord to register an exemption where an agreement for lease is exchanged before 1st April 2018 but will not complete until after that date. However, there is a suggestion within the government’s guidance information that such an exemption would only be available to those landlords who inherit a contractual obligation to grant a lease, for example buying a property which is already subject to an agreement for lease.
If the exemption can be applied, then it will only be valid if it has been registered in the Private Rented Sector exemptions register and it will also only be valid for six months from the date of the letting. After those six months, the landlord will either need to look to register a longer term exemption if available, or have carried out sufficient energy efficient works to bring the rating up to at lease an E rating.
Early Completion
It could be agreed by both parties to bring completion of the lease forward to before 1st April 2018. It will need to be determined by all those involved whether this is commercially viable based on any other conditions which need to be met before completion can occur, for example obtaining planning permission. However, this may only be a temporary solution as if the term of the lease extends beyond 1st April 2023 (or 1st April 2020 for domestic properties) then the MEES Regulations will prohibit the landlord continuing to let from that date unless an exemption applies.
Longstop Date
It could be agreed by both parties to include a longstop date in the agreement for lease of 31st March 2018 then either party may walk away if the conditions for the grant of the lease had not been satisfied by that date. This would allow both parties a way out of the agreement and would also avoid breaching the MEES Regulations if it becomes clear that it will not be possible to complete before 1st April 2018.
Energy Efficient Improvements
Works could be undertaken at the property in order to bring the EPC rating to at least an E rating. It would need to be negotiated as to who would be responsible for the cost of the works and performing them however it is likely that both would fall on the shoulders of the landlord as it is the landlord’s responsibility to comply with the MEES Regulations.
Tenant to find alternative premises
The tenant may wish to look elsewhere for alternative premises which might be more energy efficient and therefore would not cause any such issues under the MEES Regulations.
If the Tenant is obtaining funding as part of the grant of the lease then of course the lender’s requirements will need to be considered in relation to the MEES Regulations. Depending on what the Lender’s requirements are then this may mean that one or more of the above options cannot be applied.
What are the penalties for non-compliance?
The penalty for renting out a property for a period of fewer than three months in breach of the MEES Regulations will be equivalent to 10% of the property’s rateable value, subject to a minimum penalty of £5,000 and a maximum of £50,000. After three months, the penalty rises to 20% of the rateable value, with a minimum penalty of £10,000 and a maximum of £150,000.
It is therefore vital that landlords and tenants who are currently negotiating agreements for lease which may not complete before 1st April consider the effect of the MEES Regulations on the transaction. Such examples could be those agreements which are conditional on planning permission being obtained or works being carried out.
The penalties for non-compliance could make a vast financial impact on Landlords and therefore they must begin making preparations for the regulations to come into force on 1st April 2018. Therefore the EPC rating of the premises should be checked during the early stages of the transaction and if the current rating is below E, then action should be taken to ensure that no breach of the MEES Regulations occurs.
For more information please refer to the government’s guidance in relation to the MEES Regulations

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