The rules on MEES (Minimum Energy Efficiency Standards) are dealt with in The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES Regulations). The MEES Regulations only apply to properties that are required to have an EPC. The current position for commercial property is that it is unlawful to grant a lease of a property with an EPC rating of F or G, (deemed sub-standard under the MEES Regulations), unless one of the exemptions set out in the MEES Regulations applies. Amongst others this includes the:
- "consent exemption" where the ability to undertake improvement works is prevented by third party restrictions (such as the consent of a tenant, lender, superior landlord or the planning authority);
- the "reduction in market value" exemption where improvement works would reduce the market value of the property by 5% or more (as supported by a RICS registered valuer); and
- the "all-improvements made" exemption where all relevant energy efficiency improvements have been made (or there are none that can be made) and the property remains sub-standard, or situations where works would exceed the 7-year payback rule (i.e. the expected value of savings on energy bills over a 7-year period is less than the cost of carrying out the works/improvements).
There are also a limited number of temporary exemptions. Exemptions, in order to be valid, need to be registered in the national PRS exemptions register which is open for public inspection. Exemptions are time-limited so care needs to be taken to ensure that each exemption still applies at regular intervals and particularly following key events like sales/assignments.
WHAT ARE THE KEY CHANGES FROM 1 APRIL 2023?
From 1 April 2023 it will be unlawful to continue to let a commercial property with an F or G EPC rating, even if the lease was granted prior to the MEES Regulations coming into force in 2018.
DO THE MEES REGULATIONS APPLY TO ALL COMMERCIAL LEASES?
The MEES Regulations only apply to property that are required to have an EPC; so property which does not require an EPC is not affected. The requirements for needing an EPC are within the Energy Performance of Buildings (England and Wales) Regulations 2012 (EPC Regulations) and there are common misunderstandings about trigger events for an EPC and its relationship with the MEES Regulations. Advice should be sought if you are uncertain as to whether an EPC is needed to avoid inadvertently also triggering a MEES liability.
Certain types of commercial property and certain very long or very short leases are expressly excluded from the MEES Regulations, but in practice these exclusions are fairly limited. This means most types of leases are covered by the rules. This includes periodic tenancies, reversionary leases, most renewal leases and (probably) even tenancies at will. It does not include licences to occupy but these must be genuine licences: the name of a document alone will not be conclusive. Whether or not the MEES Regulations apply needs to be checked on a property by property basis.
WHAT IF THERE IS A BREACH OF THE MEES REGULATIONS?
The MEES Regulations do not require a landlord to actually carry out works by law. However, the landlord will be liable if there is a breach. The penalties include financial penalties (ranging from around £5,000-£150,000) and reputational risks as breaches are published on a public register. Breaches are enforced by Local Trading Standards. Enforcement to date has been negligible but 59 local authorities have recently been awarded government funding to help enforcement. Repeat penalty notices can be served for a breach which has not been appropriately rectified, which could lead to multiple costly fines being incurred.
ARE THERE ANY OTHER CHANGES TO LEGISLATION IN THE PIPELINE?
Legislative amendments to the MEES Regulations are expected in the very foreseeable future. Although they have not yet been enshrined in law, the Government has already consulted on a number of significant changes including a phased implementation to raise the minimum standard (currently an E) to a C EPC rating by 1 April 2027 and a B EPC rating by 1 April 2030.This is intended to operate in 2-year "compliance windows" whereby it would become obligatory for all commercial, let property to obtain an EPC and to register it on a new public database by 1 April 2025 (C EPC rating) and 1 April 2028 (B EPC rating). Then starts a compliance window within which to undertake improvement works. If works cannot ensure the required standard, this needs to be to the highest EPC band that a "cost effective package of measures can deliver". It is not yet clear exactly what this means but it appears it may be less stringent than current tests, potentially increasing the amount and cost of works that landlords need to carry out, although care still needs to be taken to ensure these are qualifying improvement works, to avoid costly mistakes. Evidence of compliance, or else a registered exemption will need to be in place by the enforcement dates of 1 April 2027 (for a C EPC rating) 2 and 1 April 2030 (for a B EPC rating) respectively. An obligation to maintain a valid EPC at all times is also under consideration capturing many properties that may have otherwise escaped a MEES liability by virtue of EPCs having expired.
Although there are no proposed changes to the existing exemptions, a new additional temporary exemption for properties being let in shell/core condition is being considered. And it's not all about landlords; the Government has indicated that it may look to impose duties regarding MEES rules on tenants especially in circumstances relating 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 DO LANDLORDS AND TENANTS NEED TO CONSIDER NOW?
To get ready for both the known and anticipated changes, it is important for landlords and tenants to consider the following key points:
- Landlords (to the extent that they have not already done so) need to identify properties that are, or, may be F or G rated within their portfolios and consider (1) whether any qualifying energy efficiency improvements works can be carried out at the property and/or (2) whether any of the exemptions apply (and will continue to apply at the relevant enforcement deadlines).
- Given the potential to interrupt the tenant's business on more than one occasion, the costs involved and the increasing importance of ESG to landlords, tenants, funders and investors alike, collaboration will be key to ensuring successful and cost-effective compliance with the regulations. Depending on the duration of the lease, it is likely to make sense for the landlord and tenant to at least consider whether it will be better (in terms of overall costs and disruption) to aim for a B rating (or as high as possible a rating) sooner than the 1 April 2030 deadline.
- The parties will need to consider whether the terms of the relevant lease dictate who will pay for the relevant improvements (which may be different for premises and common parts), how business interruption to a tenant will be managed (and, potentially, compensated), whether a tenant can lawfully prevent access to the premises for the works and how tenant fit-out (whether imminent or in the future) might impact the position.
- Tenants who grant sub-leases will need to be mindful that they will assume the responsibilities of landlords under the MEES Regulations.
- Parties will need to ensure that new leases (including renewals) and any subleases are appropriately drafted to deal with the opportunities and challenges that the MEES Regulations present to the parties.
- With regard to the consent exemption, a party refusing landlord access/permission for the works will need to consider its decision very carefully given that the fact of its refusal may become publically available information as part of any registered exemption, potentially leading to reputational damage at a time when ESG is at the forefront of customers and other key stakeholders' minds.
TIMELINE OF KEY DATES FOR COMMERCIAL PROPERTY
- 1 April 2018 – Unlawful to grant new leases of commercial property with an EPC rating of below E (the minimum standard)
- 1 April 2023 – Unlawful to "continue to let" commercial property with an EPC rating of below E (the minimum standard)
- 1 April 2025 – Requirement to register a valid EPC for let, commercial property (anticipated)
- 1 April 2027 – The minimum standard raised to EPC rating C (anticipated)
- 1 April 2028 – Further requirement to register a valid EPC for let, commercial property (anticipated)
- 1 April 2030 – The minimum standard raised to EPC rating B (anticipated)
Whether you are a landlord, tenant, lender or developer, we would be delighted to discuss how we could support you in meeting the requirements of the current and proposed MEES Regulations to mitigate and manage risks, preserve the value of your asset, maximise your returns and help you meet your ESG goals.