Energy efficiency standards- Post-Brexit uncertainty and what it means for leases

It has been ten months since The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 came into force but its future remains uncertain. Its purpose was to implement an EU Directive concerning minimum energy efficiency standards (MEES Regulations). These regulations apply to both residential and commercial property and most notably impose:

  • A prohibition on a landlord from withholding consent if a tenant wants to make energy efficiency improvements (Regardless of the lease provisions on alterations/improvements) from 1 April 2016
  • A prohibition on landlord’s from letting property if it has an Energy Performance Certificate rating of F or G (“sub-standard property”) when:
    • Granting or extending a lease from 1 April 2018
    • For all residential property from 1 April 2020
    • For all commercial property from 1 April 2023

The thinking behind these regulations was to give an incentive to landlords to make energy efficiency works that are often considered costly. A government scheme (the Green Deal) was to run alongside the MEES Regulations which would provide loans to landlords to cover the required upgrades and consequently keep the rental income flowing.

Since the Brexit vote, and thus the freedom to drop the EU Directive, Westminster is to decide whether the MEES Regulations will be kept, amended, postponed, or repealed completely. There has been no guidance from the Department of Business, Energy, and Skills on this matter and similarly the Green Deal has been mothballed with no indication on whether it will be replaced.

Despite this uncertainty some larger property companies are preparing for the possibility of stricter energy efficiency regulations by inserting clauses into their standard leases. These clauses would allow the landlord right of entry to make the required improvements and then pass the cost onto the tenant. This only seems to be prevalent with landlords in a strong bargaining position, for such clauses are likely considered to be unacceptable by most tenants. Furthermore, passing all the cost onto the tenant, or requiring them to carry out the improvements themselves, may be onerous enough to have an impact when it comes to setting the rent.

The current situation provides a challenge for drafting new leases, as those made in line with the current MEES Regulations may turn out to be out of line with an amended regime, and could rebound to either party’s detriment. Similarly, presuming energy efficiency regulations will continue and consequently upgrading a property to a high rating will be costly, and passing that liability onto the tenant may affect desirability. Like everything connected with the uncertainty of Brexit, the answer in this instance remains elusive.