The rules on minimum energy efficiency standards (MEES) are changing again and, whether you are a commercial landlord or tenant, you should be aware of how this might affect you.
The MEES regulations apply to properties that are required to have an EPC. Currently, granting a commercial lease of such a property is unlawful unless the property has an EPC rating of “E” or higher (or one of the exemptions apply). The rules apply to new leases being granted as well as lease renewals and lease extensions to existing tenants. The requirements do not currently apply to existing leases. However this is about to change. From 1 April 2023 the MEES requirements will also apply to existing leases (unless an exemption applies and has been registered).
Is compliance really necessary?
Breaches of the MEES rules are enforced by Trading Standards and the penalties include fines of up to approximately £150,000. There could also be reputational risks as breaches are published and available for the public to inspect.
Do MEES apply?
The MEES rules only apply to properties required to have an EPC. EPCs are generally required where a building is to be sold or rented out unless the building is exempt. The MEES rules do not apply to licences, short leases of less than 6 months and long leases of 99 years or more.
There are also various exemptions to the MEES rules. In order to be valid an exemption needs to be registered on the national PRS exemptions register which is available for public inspection. Exemptions are also time limited so need to be monitored carefully to make sure they do not expire, especially in connection with any key events such as sales and assignments.
The main exemptions to the MEES rules are:
- the "consent exemption" where the landlord has been unable to improve the rating because consent is required from a tenant/third party and has been refused;
- the “devaluation exemption” where improvement works would reduce the market value of the property by more than 5% (as supported by an independent surveyor report);
- the "all improvements made exemption” where all relevant energy efficiency improvements have been made (or there are none that can be made) but the EPC remains below E; and
- the “7 year payback exemption” where the landlord would not recover the costs of improvement works within a 7 year payback period.
There are also a number of temporary exemptions.
Are there any other MEES changes on the horizon?
Further changes to the MEES requirements are also expected in the near future including:
- The Government is considering a phased implementation to raise the minimum EPC rating (currently E) to a C rating by 1 April 2027 and a B rating by 1 April 2030; and
- The Government is considering new MEES rules on tenants, especially in relation to tenant fit-out works and the opportunity to introduce and pay for improvements then. This would be a significant shift from the current landlord-focused positon where recovery from tenants is often dependant on the specifics of a particular lease or commercial deal. Duties of cooperation are also in contemplation.
What does this mean for landlords?
Landlords should carry out a review of their current property portfolio as soon as possible and identity any properties with an F or G rating and consider whether they can carry out any works to improve energy efficiency and/or whether they can rely on any of the exemptions. Landlords need to make sure they are compliant by 1 April 2023.
Landlords should also keep an eye out for the more stringent MEES requirements anticipated and carry out a further review of their property portfolios in good time to identity where further action is needed, or desirable.
The terms of the lease will dictate the landlord’s rights of access and whether the landlord or tenant is liable to pay for the works.
Bearing in mind landlords are likely going to incur costs to improve their properties, many will undoubtedly try to recoup some of those costs by rent increases and/or via ‘service charge’ provisions. Any existing lease terms will need to be considered carefully to check where costs can be recouped and what process to follow. Depending on the nature of the energy efficiency works carried out, it is also possible that the works themselves will increase the value of the property and the market rent as a result.
What does it mean for tenants?
From a tenant’s perspective, improvement works can be disruptive to the tenant’s business and it makes sense for landlord and tenants to work together and agree on the best way to implement the changes and whether additional improvement should be carried out at the same time, aiming for a higher rating than what is currently required in order to keep the long-term disruption to a minimum.
Tenants also need to be mindful that, if they grant a sublease, they will assume responsibilities as a landlord under the MEES rules.
If tenants refuse access for the works, this will activate one of the exemptions, which is required to be registered and so the tenant’s refusal may become publicly available which could result in reputational damage.
How can we help ?
Whether you are a commercial landlord or a tenant, Nicholsons can help you identify your rights and obligations and help resolve any lease disputes. For more information please contact our Property Disputes Partner Sabina Haag on 01502 532323 or sahaag@nicholsonslaw.com.
This is not legal advice; it is intended to provide information of general interest about current legal issues.