New regulations on minimum energy efficiency standards (known as ‘MEES’) for privately rented commercial properties in England and Wales have been passed and come into force on 1st April 2016. MEES will have a significant impact on commercial landlords, and consequently tenants, of properties that have a poor energy efficiency rating, i.e. below an ‘E’ rating, under an Energy Performance Certificate (EPC). In broad terms an EPC is required whenever a property is bought or let.

The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES)

MEES form part of the Government’s broad strategy to improve the energy efficiency of buildings and to meet its national and international climate change targets. The Government estimates that 18% of privately rented commercial buildings have an ‘F’ or ‘G’ energy rating and so fall below the minimum standard required. Similar regulations have been made for residential properties but this article focuses on commercial properties.

MEES introduce two important deadlines for commercial landlords:

From 1st April 2018, it will be a criminal offence for landlords to grant new leases (including renewals and extensions of leases to existing tenants) of properties that fall below the minimum ‘E’ rating; and
From 1 April 2023, landlords will be in breach of MEES if they continue to let, under existing leases, properties that falls below the minimum ‘E’ rating.

Landlords will need to carry out energy efficiency improvements to properties to upgrade their EPC rating to the minimum standard within these deadlines (subject to limited exemptions and qualifications). Those that don’t could face hefty financial penalties.

What steps should landlords take?

  • If they have not done so already, identify any properties with an EPC below an ‘E’ rating and put in place a plan for complying with MEES. A programme of works may be necessary to upgrade a poor EPC rating;
  • Review existing leases to check whether they reserve rights of access for the landlord to carry out any planned improvement works and whether the cost of such works can be recovered in whole or part from the existing tenants;
  • Possibly consult/negotiate with existing tenants to agree a plan for complying with MEES. However, there is no statutory obligation for the tenant to consent or co-operate with the landlord. In fact, for landlords, there is an exemption from the obligation to meet the minimum energy standard where the tenant’s consent to works cannot be obtained. This means it may be in both parties’ interests for the tenant to refuse consent to the landlord’s proposals;
  • Use any void periods to carry out improvement works before re-letting; and
  • If granting new leases that will continue beyond 1st April 2023, include rights for the landlord to carry out any future works needed to comply with MEES and, ideally, to recover the costs from the tenant.

What steps should tenants take?

Review existing leases to check:

  • if approached by a landlord wishing to carry out improvement works, the landlord has the necessary rights under the lease to do so or whether it requires the tenant’s consent. Tenants will want to minimise, where possible, the disruption of landlord’s works;
  • whether the landlord is entitled to charge the tenant for the cost of any improvement works, e.g. through the service charge. This will depend upon how widely the service charge is drafted and the nature of the works. Most conventional service charge provisions will allow the landlord to recover the costs of ‘repair’ or ‘maintenance’ but not ‘improvement’ or ‘replacement’. A landlord cannot generally recover the cost of upgrading kit such as air-conditioning and boilers that is still in working order.
  •  If considering a new lease of a property with a poor EPC rating bear in mind that the landlord, over time, is likely to need to carry out improvement works to comply with MEES. Raise enquiries with the landlord about any proposed improvement works. If the tenant is not prepared to cover the cost of any such works, include a specific exclusion in the lease.
  • When negotiating a new lease, watch out for provisions imposing tight controls on the tenant’s use of the property to prevent it from doing anything which could lower the EPC rating, e.g. from a change of use or alterations. Ensure the lease remains flexible enough to meet the tenant’s business needs.
  • Avoid any obligation to repair, reinstate or yield up the property to a specific minimum EPC rating. Going forward, it is expected that the methodology used to set EPC ratings could change with higher standards being introduced.

Comment

This is a new area of law and it remains to be seen how landlords of affected properties will react to MEES. However, whilst the regulations do not bite until 2018 at the earliest, well advised landlords will be considering their options for improving the energy efficiency of low-rated properties now. Tenants need to be aware of the potential impact of landlords’ improvement works. Whilst it may be in a tenant’s interest to have an energy efficient building it is unlikely to be prepared to meet the entire cost and to suffer any disruption to its business from such improvements works.