TEN things you need to know about the minimum energy efficiency standards if you own or occupy commercial property. It would be a MEES take not to read this.
- THE CURRENT POSITION
Since 1 April 2018 the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the PRS Regulations) sets a minimum energy efficiency standard (MEES) of EPC E for private rented properties. This means that it is unlawful for landlords to grant a new tenancy of commercial property with an EPC rating of ‘F’ or ‘G’ (the two lowest grades of energy efficiency). This applies to both new leases and renewals (unless an exemption applies and the landlord has registered that exemption).
From 1 April 2023, this will be extended to include existing leases making it unlawful for a landlord to continue to let commercial property (unless an exemption applies and is validly registered).
- SUSTAINABILITY IS HIGH ON THE AGENDA AND NEW COMPLIANCE WINDOWS WILL BE IMPLEMENTED
The Government has confirmed in the Energy White Paper that it intends to make it unlawful to continue to let commercial property with an EPC rating of below B by 2030 and on 17th March 2021, it issued its proposed framework in a new consultation for private-rented properties. This forms part of its “package of measures’ to reduce carbon emissions as it is estimated that bringing the minimum standard to a B rating will bring around 85% of commercial buildings into scope. The proposed framework sets out a phased implementation with the introduction of compliance windows as follows:
First Compliance Window: EPC C (2025-2027)
- 1 April 2025: Landlords of all commercial rented buildings in scope of MEES must present a valid EPC.
- 1 April 2027: All commercial rented buildings must have improved the building to an EPC ≥ C, or register a valid exemption.
Second Compliance Window: EPC B (2028 – 2030)
- 1 April 2028: Landlords of all commercial rented buildings in scope of MEES must present a valid EPC.
- 1 April 2030: All commercial rented buildings must have improved the building to an EPC ≥ B, or register a valid exemption.
This may be an incremental pathway but landlords be aware because at each enforcement in 2027 and 2030, landlords will need to demonstrate that the building has reached the highest EPC band that a cost-effective package of measures can deliver. In addition, the Government intend to introduce the necessity for landlords to present a valid EPC two years before the relevant enforcement date for each EPC target. In essence, this will involve submitting the current EPC to an online PRS compliance and exemptions database. This will trigger a clear time period within which landlords will be expected to undertake improvements if they have not done so already.
- DOES MEES APPLY TO LISTED BUILDINGS?
Unfortunately this is unclear. The Historic England website tells us that “From January 2013 there has been an ‘exemption’ for listed buildings. However, the exemption is qualified, it states: “Insofar as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance”.”(EPC Regulation 5). We also know that MEES only applies to buildings for which an EPC is required and so on the premise that EPCs are not required for listed buildings, this would mean MEES will not apply. In its March 2021 consultation, the Government proposes to catch listed buildings and those in conservation areas – which are to be rented out – to have an EPC (unless a valid exemption is registered).
It is proposed that the current exemptions available will continue to apply. This will mean (amongst others) that:-
- Landlords will only be required to carry out works that are cost-effective under the 7 year payback test. Broadly speaking, this means that the expected value of savings on energy bills over a 7 year period is equal to, or greater than, the cost of the measures.
- Landlords may continue to let if they can show that the building has reached the highest rating that is possible after undertaking a cost-effective package of measures.
Exemptions last for 5 years (some are as temporary as 6 months) and are personal to the owner of the building. The exemption does not run with the land and so if the building is sold, the new owner must apply to register the exemption and all exemptions must be validly registered in order to be effective. After the exemption expires, landlords will need to reapply with evidence that the exemption continues to apply.
- WHAT HAPPENS IF A LEASE IS GRANTED OR CONTINUED IN BREACH OF THE MEES REGS
The lease will still be valid and enforceable if completed in breach of the MEES regulations. The current consequences for breaches of MEES standards include penalties of 10 or 20% of the rateable value of the Property (capped at £50,000 – £150,000), with the possibility of enforcement action by the local authority being taken against unlawful tenancies.
Do all lettings apply? No. The MEES Regulations do not extend to:
- short leases of less than 6 months (but a continuous period of occupation exceeding 12 months would bring the Regulations into play);
- leases of 99 years or more; and
- LANDLORD AND TENANT ISSUES: COSTS
Landlords may need to install measures in order to bring the premises up to the required minimum standard before they can let. Can the landlord pass this cost on to the tenant? Certainly, in the grant of new leases, landlords will look to pass the cost on to the tenant by way of an enhanced rent and given that the more energy efficient its building stock is, this should reduce tenant outgoings. However, with existing leases, the question of whether costs of energy efficiency works can be passed on to the tenant will invariably be a question of what the lease says about recouping this expenditure under the service charge.
Comment – Parties are advised to review their leases as landlords could argue that the tenant would be benefiting from reduced energy bills once the works have been carried out. However, the tenant (depending on the residual length of the lease term) could argue that the works would improve the value of the asset and therefore increase the landlord’s prospects of letting the premises at the end of the lease term.
- LANDLORD AND TENANT ISSUES: REINSTATEMENT AND DILAPIDATIONS
Many leases require that the tenant reinstate the premises at the end of the term. However, if the tenant has improved the energy rating during its period of occupation, the landlord will want to continue benefiting from such energy rating and so reinstatement may not be necessary. Similarly, if the landlord is required to undertake works on expiry of a lease, in order to lawfully let the premises to a new tenant, the outgoing tenant should think ahead and negotiate with landlords to see if any repair work it must undertake pursuant to the lease is actually necessary.
- LANDLORD AND TENANT ISSUES: LANDLORD ACCESS RIGHTS
If the landlord requires access to the tenant’s demised premises in order to carry out works to increase the energy rating, unless the lease reserves a right of access, the landlord will need to rely on the tenant agreeing to grant such access. This could be a problem where the relationship between the parties has deteriorated and thus could be a good opportunity for tenants to renegotiate their position, such as agreeing to grant access in exchange for a rent free period whilst works are being carried out.
- LANDLORD AND TENANT ISSUES: SHELL AND CORE LETTINGS
Issues arise when commercial premises are to be let in a shell and core state, where it is only the tenant’s fit out that will increase the EPC rating. However, if a shell and core unit does not meet the minimum standard, the landlord cannot lawfully let, and so almost inevitably transactions will require the additional complexity and cost of conditional agreements for lease. In its March 2021 consultation, the Government highlighted this as an issue and stated that for a shell and core property, where the compliance deadline has been missed, that a tenant must have occupied the property for a minimum of six months before a local authority can take action against the landlord for failing to meet MEES.
Comment – There needs to be an increased contractual requirement for collaboration between landlords and tenants in leases and landlords must ensure that sufficient drafting is included in order to protect themselves contractually, including obtaining a tenant commitment to complete energy efficiency works within a relevant timeframe (if the EPC rating rests on the tenants fit out), and step-in rights to complete the works (at the tenant’s cost) should the tenant fail to do so. The March 2021 Consultation also addressed a potential amended to the Regulations in order to give tenants of commercial property some duties regarding compliance with MEES, and to add duties of cooperation for both landlord and tenant.
- LANDLORD AND TENANT ISSUES: VALUATION
Owners need to consider the existing ratings of properties that they may be planning to sell in the short to medium term. Even if such properties are MEES compliant now, potential buyers will be conscious of the changes coming down the tracks, and this may have an effect on valuation.