Part 10 - Energy regulations (Minimum Energy Efficiency Standard) (MEES) and Rating
The Valuation Office Agency's (VOA) technical manual for the rating of business (non-domestic) property.
Energy Act 2011
Energy Performance of Buildings (England and Wales) Regulations 2012 (SI 2012/3118)
Si 2015/962 Energy Efficiency (Private Rented Property)(England & Wales) Regs 2015
See also non-dom-private-rented-property-minimum-standard-landlord-guidance.pdf for more detailed information regarding nondomestic properties, exemptions and EPC certificates.
2.1 A building must have an EPC certificate if it is:-
- rented out
- sold
- was under construction and then finished or
- there are changes to the number of parts used for separate occupation and these changes involved providing or extending fixed hearing, air conditioning or mechanical ventilation systems
It is the action of selling, renting out or construction that triggers the requirement for an EPC. Therefore, existing occupiers and tenants will not require an EPC unless they sell, assign or sublet their interest in a building on or after the dates the regulatory requirements came into force.
2.2 There are additional rules that apply for landlords / lessors in respect of properties that had an EPC certificate or were required to have one.
From 1 April 2018, landlords of non-domestic properties were not allowed to grant a tenancy if they their EPC certificate rating was below an E unless the premises were registered as exempt or not required to have a certificate.
2.3 In addition to the above, from 1 April 2023, the prohibition was extended to include all existing tenancies as well, ie Landlords could not continue to let properties if the EPC certificate was below an E
2.4 There are separate rules for domestic properties
2.5 Be aware, the definition of domestic and non-domestic property is different under the Energy Act legislation to the Rating definition under LGFA 1988.
3.1 The regulations preventing landlords of non-domestic properties selling or from letting them until the minimum energy efficiency standard is met (s49 Energy Act 2011)
3.2 If the property does not have an Energy Certificate, or is exempt, then the prohibition regulations will not apply (Energy Act 2011 reg 49(1)b refers and Reg 27 SI 2015/962).
s49(1) The Secretary of State must make regulations for the purpose of securing that a landlord of a non-domestic PR property –
(a) which is of such a description of non-domestic PR property as is provided for by the regulations,
(b) in relation to which there is an energy performance certificate, and
(c) which falls below such level of energy efficiency (as demonstrated by the energy performance certificate) as is provided for by the regulations,
may not let the property until the landlord has complied with the obligation mentioned in subsection (2).
(2) The obligation is to make to the property such relevant energy efficiency improvements as are provided for by the regulations
27(1) A landlord of a sub-standard non-domestic PR property must not let the property unless regulation 29, or one or more of the exemptions in Chapter 4, applies.
(2) For the purposes of paragraph (1), “let the property” means –
(a) on or after 1 April 2018, grant a new tenancy which falls within section 42(1)(b) of the Act, or let the property on such a tenancy as a result of an extension or renewal of an existing tenancy, or
(b) on or after 1 April 2023, continue to let the property on such a tenancy.
“sub-standard” property is explained in regulation 22(1) –
22(1) For the purposes of this part-
(a) ….a non-domestic PR property is “sub-standard” where the valid energy performance certificate expresses the nearby performance indicator of the property as being below the minimum level of energy efficiency.
The valuation of non-domestic property for rating is to be carried out in accordance with schedule 6 to the LGFA1988 Paragraph 2(1) of schedule 6 states–
2(1) The rateable value of a non-domestic hereditament…..shall be taken to be an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year on these three assumptions-
(a) the first assumption is that the tenancy begins on the day by reference to which the determination is to be made;
(b) the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic;
(c) the third assumption is that the tenant undertakes to pay all usual tenant’s rates and taxes and to bear the cost of the repairs and insurance and the other expenses (if any) necessary to maintain the hereditament in a state to command the rent mentioned above.
5.1 The simple answer to this question is No.
For the detailed reasons given in Appendix 1 below.
The prohibition on letting premises has to be disregarded in order to be able to give lawful effect to the statutory valuation hypothesis.
5.2 In other words, when considering the property for rating purposes the principle is that the property still has to be assumed to be vacant and to let on the open market even if in reality it is prohibited from being let.
Detailed advice and case law is set out in Appendix 1.
Schedule 6 para 2(7) Physical matters and the prohibition on letting under s27 Energy Regulations
6.1 Any prohibition on letting property must be disregarded by the valuer in order to give lawful effect to the statutory valuation hypothesis, i.e. the property has to be valued vacant and to let.
6.2 Consequently the existence of statutory prohibition on letting cannot affect the physical enjoyment of the hereditament or the mode or category of its occupation as prescribed under para 2(7) as this remains unchanged.
6.3 It is not the existence of the prohibition under Reg 27 that is the operative factor, rather it is a change in the physical state of the premises or physical enjoyment that affects the value of the occupation.
6.4 The statutory prohibition may be lifted if the actual landlord applies for exemption or complies with the energy efficiency requirements by carrying out the appropriate ‘works’ which may, but not always, alter the physical state of the property. It is the change to the physical state of the property that may affect the value of the property, not the prohibition on letting in itself.
7.1 A proposal can be made, but no effect can be given to it as the prohibition itself has to be disregarded. However, if there are actual physical changes to the property due to the works required then these may affect the valuation as a physical MCC.
7.2 MCC A material change of circumstances is defined by reference to those matters referred to in Para 2(7) of Schedule 6 (Regulation 3 of 2009 SI 2268).
Proposals
7.3 A proposal for a reduction to the assessment because of a “material change of circumstances” can only be made under regulation 4(1)(b) of the Non Domestic Rating (Alteration of Lists and appeals)(England) Regulations 2009 SI 2268, or the equivalent in Non-Domestic Rating (Alteration of Lists and Appeals) (Wales) Regulations 2023 SI 350.
7.4 MCC proposals may be made [S.4(1)(b)] where –
‘the rateable value shown in the list for a hereditament is inaccurate by reason of a material change of circumstances which occurred on or after the day on which the list was compiled’.
7.5 Legal advice provided by Counsel states that the prohibition on letting in itself is not a matter named above and therefore cannot result in an MCC proposal being made to alter the list.
7.6 The prohibition on letting is not a ‘matter’ within Schedule 6(2). It only affects the ability to let the premises it does not prevent occupation.
7.7 Grounds not constituting an MCC:
A proposal quoting MEES and prohibition as an MCC ground should be treated as follows:
7.8 The fact that a proposal makes reference to an MCC on this basis does not make it incomplete under Reg 8, even if the VO does not think the grounds actually constitute an MCC. However, due to the changes in the legislation on MCCs – Non Domestic Rating Act 2023 s14 amends LGFA 1988 schedule 6 so that no MCC can be made for MEEs during the life of the list as it will be only taken into account at AVD on revaluation.
7.9 The caseworker should issue a response and subsequent decision notice stating that an MCC has not occurred and the Rating List cannot be amended, explaining the reasons why. Any other issues raised by the Proposer should also be addressed in the final decision notice.
In the case of purported MCCs referring to prohibition on letting under MEES the following wording is suggested to be included in the final decision notice:-
‘The proposal in this case has been submitted on the grounds of Regulation 4(1)(b) of the Non Domestic Rating (Alteration of Lists and Appeals)(England) Regulations 2009 SI 2268:
’ the rateable value shown in the list for a hereditament is inaccurate by reason of a material change of circumstances which occurred on or after the day on which the list was compiled ‘
OR for Wales:
‘The proposal in this case has been submitted on the grounds of Regulation 4(1)(b) of the Non-Domestic Rating (Alteration of Lists and Appeals) (Wales) Regulations 2023 SI 350:
’ the rateable value shown in the list for a hereditament is inaccurate because of a material change of circumstances which occurred on or after the day on which the list was compiled ‘
Having reviewed the grounds of the proposal, the particulars of the grounds and the accompanying evidence together with the detailed explanation, I do not consider that the grounds submitted in the proposal correctly constitute a material change of circumstances which affects the rateable value shown in the Rating List. I am therefore unable to agree to alter the rating list as proposed.
Any prohibition on the letting of property under Regulation 27 of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) must be left out of account in order to give lawful effect to the statutory assumption in paragraph 2 of Schedule 6 to the Local Government Finance Act 1988. For rating purposes, the property has to be valued as vacant and to let.
The existence of the prohibition affects the ability to let the property, it does not affect the physical state or physical occupation and enjoyment of it. Consequently the ‘prohibition’ is incapable of constituting a ‘matter’ within the meaning of paragraph 2(7) of Schedule 6 Local Government Finance Act 1988 and therefore cannot give rise to a material change of circumstances.
It is therefore submitted that the grounds of the proposal, that the rateable value is inaccurate by reason of a material change of circumstances, has not been proven as no identified material change of circumstances has taken place.
Are works carried out for MEES compliance improvements or repair?
8.1 If a property is classed as being substandard by the Energy Regulations it may or may not be in disrepair and the works required to be carried out may be classified as improvements or repairs depending on the facts of the case. (see RM Part 6 disrepair).
8.2 Sched 6 (2)(1) LGFA 1988 refers:-
(b) the second assumption is that immediately before the tenancy begins the hereditament is in a state of reasonable repair, but excluding from this assumption any repairs which a reasonable landlord would consider uneconomic;
8.3 Energy efficiency improvement works required to bring a property up to the minimum efficiency standards may or may not constitute ‘repair’ works for rating purposes depending on what they are, the timing of their replacement and their remaining life.
8.4 Under the Rating repairing assumption, improvements cannot be assumed to be carried out at the start of the lease, unlike works to remedy disrepair.
8.5 Costings provided by ratepayers for works to the property will need to be carefully considered to distinguish between repairs and improvements, as the former will need to be ignored. For example:
- replacement of an inefficient boiler that has not reached the end of its natural life is not disrepair as it is still working, albeit inefficiently, and its early replacement could constitute an improvement rather than a repair.
- Replacing filament bulb lighting with LED equivalents could be repair if the bulbs had expired, or improvement if there is nothing actually wrong with the existing lighting.
8.6 Some repairs can include replacement by a higher quality item, .e.g. of single glazed windows by the standard modern double glazed replacement which may incidentally also be an energy efficient improvement. These works would be disregarded for rating purposes.
8.7 The concept of ‘repair’ is broad enough to allow some alterations which may result in differences to the historic state. For example, in Monk, the Court of Appeal applied the test identified by Buckley LJ in Lurcott v Wakely, namely:
“Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion.”
9.1 A revaluation took place on 1 April 2023 based on an antecedent valuation date (AVD) of 1 April 2021 and regular revaluations are due thereafter.
9.2 It would therefore be a known fact that at the appropriate AVD, that properties with substandard EPCs are required to meet the energy efficiency standards if they were being sold or let and that, if they were not registered as exempt, the owner or landlord would be aware that they could potentially face penalties for non-compliance of the MEES regulations. So no adjustments should be made to any rent set from 2015.
e.g. those properties which are sold, marketed, let or new builds, or altered after 1 April 2008 (2012 regs) currently rated F or G. (n.b. this is extended in 2023 on non-domestic property to existing tenanted property.
9.3 It is therefore reasonable to assume that rents set at AVD will reflect the legislation as it was a known requirement at that time.
9.4 It would also be known at AVD that after 1 April 2020 (domestic properties) and 1 April 2023 (non-domestic properties) there would be a prohibition on all lettings of properties with substandard EPCs unless it was registered exempt (either from an EPC itself, or under one of the exemptions applicable to private lettings). So for all future rating lists the rental evidence will reflect the existence of the MEEs regulations.
9.5 For valuation purposes, the prohibition on letting on the actual property does not affect the approach to valuation as it is not a ‘matter’ (physical matters or physically manifest) for consideration under Schedule 6(2), and should therefore be ignored. Any requests for deletion as incapable of beneficial occupation due to prohibition should be refused.
9.6 The rents paid by tenants and those charged by the landlord for properties will reflect the premises as they stand including the energy efficiency levels appertaining to it and any consequences of non-compliance ie possible penalties that may be imposed for letting with an EPC below E.
9.7 In analysing rental data for revaluation, particular care will be needed regarding tenant’s works to the property as some may constitute repair and others improvements. For example, a boiler still working and not at the end of its life span, which is being replaced, could be considered as an energy efficiency improvement, as opposed to a defunct boiler being replaced which could be seen as repair and disregarded. However windows being replaced by modern equivalents due to disrepair but also having the effect of improving the energy efficiency could still constitute repairs and should not be amortized in the analysis as a tenant’s improvement. Each property and rental analysis will have to be determined on its own facts.
9.8 The effect of an energy efficiency rating (EPC) on value e.g. ‘A’ rating compared to a substandard ‘F or G’ one will only be determined by detailed consideration and analysis of the rental evidence to discern if the market actually differentiates between the different categories in terms of price per square metre. It is unlikely in reality that we will actually have the level of detail required regarding leases and rents to be able to make that distinction or establish different levels of value for substandard properties, although London City offices may be an exception due to the number of ‘green offices’ which may form their own market with their own levels of value.. It is more likely that the actual physical characteristics and attributes of the properties in question will influence the rental levels.
9.9 More detail on this is in the Rental Adjustment section of the RM at paragraph 10 here VOA - R2017 Rental evidence and valuation issues
10.1 The Minimum Energy Efficiency Standards (MEES) Regulations changed on 1 April 2023, with implications for both Landlords and Tenants. This item considers these changes and the implications for existing leases. See also PKU 28 dated 11 October 2018 and subsequently Section 37 of the DVS Principles and Practices Manual.
Background
10.2 The Minimum Energy Efficiency Standards (MEES) for commercial property came into effect with the ‘Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015’.
They are supplemented by accompanying guidance titled ‘Guidance for landlords and enforcement authorities on the minimum level of energy efficiency required to let non-domestic property under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015’ (February 2017) (“Guidance”). The Guidance was updated in late 2019.
10.3 Together, the Regulations and the Guidance established that from 1 April 2018, commercial properties should not be let if they had an Energy Performance rating (recorded in an Energy Performance Certificate [EPC]) of F or G.
Unless an applicable exception applied, properties which had these low F or G ratings would need to make energy efficiency improvements. The intention was that further Regulations could if necessary be introduced as required to support the government ‘net-zero by 2050’ policy.
10.4 Although MEES applies to commercial properties, certain properties may not require an EPC. These are listed buildings, buildings used as places of worship, and industrial sites, workshops and non-residential agricultural buildings with low energy demand.
What is Changed in 2023?
10.5 Regulation 27 of the MEES Regs states that a landlord must not let sub-standard commercial property or continue to let such property after 1 April 2023.
In more detail, from 1 April 2023, landlords must not continue to let a sub-standard non-domestic property to existing tenants (even where there has been no tenancy renewal, extension or indeed new tenancy) or to new tenants, unless:
a) an exemption applies and has been registered; or
b) all relevant energy efficiency improvements have been made (or there are none that can be made), the EPC remains below E, and the exception has been registered on the Exemptions Register.
10.6 In other words, from April 2023, the intention is that unless there is an applicable exemption, a commercial property must be upgraded with appropriate energy improvements either before re-letting or during the lifetime of an existing lease so that it exceeds a F or G rating.
It will no longer be a question of waiting for a renewal or remarketing of the property. The upgrade may occur during the tenure of an existing lease.
10.7 The Guidance makes clear that renewal processes under the Landlord and Tenant Act 1954 Part II are not prejudiced or affected by the energy rating. This means that statutory renewals may continue to take place whether or not any necessary upgrade has taken place.
Whose responsibility is the conduct of energy improvement works?
10.8 The MEES Regs apply to landlords so, in principle, it is the landlord’s issue to resolve. However, as explained below, there may also be consequences for the tenant.
The Guidance makes clear that the MEES Regs are not intended to apply to licences to occupy, only to leases, so licensors do not need to be concerned in the same way as landlords.
The Crown is bound by the MEES Regs on the basis of s.53 of the Energy Act 2011 so there is no general exception for any Government Department or agency.
Landlords: What happens on 1 April 2023?
10.9 There is no immediate obligation on the landlord to carry out any action but a commercial property which is let with a rating of F or G will no longer be compliant with the MEES Regs unless it has an exemption. Note – if the property changes hands the new landlord will have to apply for a new exemption.
10.10 If a property remains non-compliant, then the landlord is liable to enforcement action by the relevant trading standards authority. That may occur because either a complaint has been made or the local authority is being proactive in pursuing landlords who are non-compliant. Enforcement Action can only be avoided if the landlord has an exemption and has entered this on the PRS Exemptions Register.
10.11 Enforcement can include financial penalties which, for a persistent breach, amount to the greater of £10k or 20% of rateable value of the property at the date of service of the penalty notice, up to a max of £150k. Additionally, the enforcement authority may publish details of a landlord’s breach on the publicly accessible part of the PRS Exemptions Register.
Tenants: What happened on 1 April 2023?
10.12 The MEES change doesn’t affect the validity of any lease. The lease remains in force so the tenant does not need to be concerned as to their continued right of occupation. The tenant will require to comply with the terms of the lease, as before.
10.13 This means that a tenant could find itself in the potentially uncomfortable position of occupying premises which are known to be non-compliant. There are a number of potential points for the tenant to consider in these circumstances:
a) Underletting: The tenant will not be able to underlet lawfully while the premises remain non-compliant.
b) Impact on rent review: It is possible that the rent review clause in a particular lease may include assumptions and disregards which have the impact of ignoring the fact that the premises are not legally compliant; i.e. when assessing the rent on review, the clause’s wording is such that it is assumed that the premises have a higher energy efficiency than they do in reality. A tenant could, therefore, find itself paying a level of rent on the basis of the false assumption that they are compliant with the regulations and ignoring the reality that the premises could not be readily marketed.
c) Cost of improvement work passed on? While the cost of undertaking building improvements sits with the landlord, it is possible that some costs may be passed through to the tenant as part of a service charge or other mechanism under the terms of the lease. While these costs may be offset by reduced utility costs over time, this may be a small comfort to the tenant under a short term letting.
d) Disruptive works: The landlord when undertaking the upgrade works may need to enter the premises to do this. From the tenant’s perspective, and subject to the terms of the lease for entry by the landlord, there may be a need to expect and plan around disruptive landlord’s works.
What Next?
10.14 Beyond 2023, the standard is expected to be raised further over the next few years by fresh Regulations. Current indications are that the minimum standard may be raised to a C in 2027 and B from 2030.