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News & opinion

5 MAR 2018

How will MEES impact dilapidation claims?

Christopher Sullivan looks at the potential impact of the Minimum Energy Efficiency Standards on dilapidations claims.

Much has been written already about the phased introduction of the Minimum Energy Efficiency Standards (MEES).

Tenants and landlords alike should ensure they understand the potentially significant impact of this incoming legislation on dilapidations claims, particularly in relation to a building’s mechanical and electrical (M&E) installations.

Although there are exceptions, from 1 April 2018 most buildings will require an energy performance certificate (EPC) rating of E or better when a building is sold, or on a new letting. If the rating falls below this, works will be needed to improve the building’s energy efficiency. From 1 April 2023, these provisions will then be extended to cover existing leases.

The most obvious and often the cheapest way to improve an EPC is to replace older lightbulbs with those using LEDs. Replacing older heating and cooling systems also tends to improve EPC ratings significantly.

But how do the MEES affect dilapidations claims? What happens if the landlord elects to replace ageing but still functioning M&E systems to boost the building’s marketability?

Disrepair

Demonstrating that there is disrepair is essential in dilapidations claims. In terms of M&E services, this can be an expensive and time-consuming process, and may require specialist validation. If the only method of repair is renewal then there should be no issue with using the modern equivalent of the installations originally demised.

Such replacements must also comply with the current building regulations and any other applicable standards and legislation. It would, for instance, be illegal to replace a 25-year-old boiler with a similarly inefficient one as this would not comply with the building regulations.

In circumstances where repair, rather than replacement, is the most appropriate way of complying with the repairing covenant but the landlord still opts to replace the system, the repairs would be effectively rendered valueless and the landlord would very likely lose the claim for the system’s repair. In practice, however, it is often difficult for the tenant to prove that this is what the landlord plans to do.

Renewal

But does this mean that tenants can just stop maintaining their plant and equipment in hope of arguing supersession at lease expiry? In a word, no. This is a short-sighted and risky approach since such neglect could result in the equipment’s premature failure: the tenant would then certainly be in breach of an obligation to maintain. Renewal may then be the only viable option to comply with the covenant, and any hope of claiming supersession will evaporate.

Aware that their improvement plans may scupper claims to upgrade or improve M&E installations at lease-end, many landlords are simply not even attempting to pass the costs of such improvements on to the tenant at this stage. During the lease, however, interim dilapidations claims are not hampered by the prospect of supersession, and we may well see a rise in the number of these as a result.

Nevertheless, this course of action is not without difficulty, particularly where the landlord relies on what is often referred to as a “Jervis v Harris” clause, so-called because it enables  them to inspect premises, serve a repair notice on the tenant, carry out repairs when the tenant fails to do so, and recover the cost as a debt.

Landlords will undoubtedly be looking at redrafting their standard leases to take advantage of this opportunity to make improvements in the future.

Misconceptions

At this point, it is worth dealing with a couple of misconceptions. Many in the industry mistakenly think that, come the 2018 or 2023 deadlines, every building will need an EPC. This is incorrect: there is no such legal requirement unless it is triggered by a sale or letting event.

Another important point is that if an existing EPC expires before 1 April 2023 then a new certificate will not be required until a trigger event occurs. This means that such buildings with ongoing leases can continue to be let beyond 2023, even if they are F- or G-rated. It is only on sale or a new lease that a new EPC will be required and the property must satisfy the minimum rating.

It seems highly likely that we will see an escalation in dilapidations disputes relating to MEES and services installations. The best advice at this stage is to continue to maintain and repair M&E equipment, and for both tenants and landlords to be aware that specialist validation may be required to support – or defend – a dilapidations claim. Sooner or later the legislation will bite, so the prudent landlord must plan ahead.

Christopher Sullivan is a partner at Malcolm Hollis