1 April 2023 is an important date in the application of minimum energy efficiency standards (MEES) to commercial property in England and Wales. From 1 April 2023, there will be a prohibition on landlords of commercial property continuing to let properties (whenever the lease was first entered into) with an energy performance certificate (EPC) rating of either ‘F’ or ‘G’ (i.e. that is “sub-standard”), unless certain exemptions apply.
1 April 2023 is an important date in the application of MEES to commercial property in England and Wales. From that date, there will be a prohibition on landlords of commercial property continuing to let properties (whenever the lease was first entered into) with an EPC rating of either ‘F’ or ‘G’ (i.e. that is “sub-standard”), unless certain exemptions apply (see Which exemptions are available? below). Holding over by a tenant after expiry of the contractual term counts as “continuing to let”.
MEES has already applied to the grant of new leases or the renewal or extension of existing leases since 1 April 2018.
MEES does not prohibit the sale of a sub-standard property, but clearly the purchaser may inherit a problem if the property has a sub-standard rating.
Importantly, where a property is let (or continues to be let) in breach of MEES, the lease remains valid and in force, but the landlord will be in breach of MEES and exposed to potential penalties, unless an exemption applies (see Which exemptions are available? below). While it is unlawful to grant a new lease of sub-standard rated property or, from 1 April 2023, to continue leases at such a property, the unlawfulness refers to the potential penalties (see What are the penalties for non-compliance with MEES? below) that the landlord may receive.
What should you be doing to prepare?
Audit your portfolio:
- Is there an EPC for the property? MEES can only apply if there is an EPC, otherwise there can be no rating. There may be more than one EPC for a property – i.e. different let premises/units within the property may have different EPCs.
- Does each EPC have a rating of at least an “E”? If the EPC has a rating of “F” or “G”, are any exemptions available (see Which exemptions are available? below)?
An EPC is required on most sales or lettings. If there is a lease renewal or extension to an existing tenant and there is no EPC (because for example the previous one has expired), there is Government guidance (see page 8) that suggests that a new EPC does not have to be provided to the tenant for the renewal or extension lease (because the tenant is taken to be aware of the energy performance position as they are the tenant). It should be noted, however, that there is other conflicting Government guidance on this point. There is a financial penalty for not providing an EPC when one is required by law.
- Only landlords can receive the penalties (see What are the penalties for non-compliance with MEES? below) for MEES. However, if a tenant sub-lets, they will be a landlord and MEES would potentially apply to that sub-lease too.
Be cautious with wholesale EPC renewals:
Where you hold a valid EPC or you are not otherwise required to obtain an EPC for a property, a new EPC may see a property’s rating downgraded which may engage MEES obligations, where the property could otherwise have been lawfully let for the foreseeable future.
What are the penalties for non-compliance with MEES?
The enforcement authority (local authority) can impose both financial and publication penalties. These penalties are civil and not criminal.
Penalties (set out below) can be levied in respect of each unlawful tenancy. In a multi-let building, financial penalties can quickly add up.
If a publication penalty is imposed, then details of the breach will be entered by the enforcement authority on the publicly accessible part of the Government’s PRS Exemptions Register, resulting in potentially adverse publicity for the landlord in breach.
Which exemptions are available?
The main exemptions available to commercial landlords (which are personal to the particular landlord and have to be registered on the PRS Exemptions Register) are:
- Lack of consent – the landlord has been unable to obtain any necessary third-party consent to undertake necessary energy improvement works (e.g. planning, tenant’s consent to works). Some landlords introduce consent exemption drafting to utilise this consent exemption to avoid penalties. This is likely to be the most common exemption used.
- 7-year payback test – the necessary energy improvement works will not ‘pay for itself’ by way of energy bill savings over a 7-year period. There are, therefore, no “relevant energy improvement works” that can be carried out, or all such works have been carried out and the EPC remains below an “E”.
- Devaluation – improvements will reduce the market value of the property by more than 5% (to be supported by expert valuation evidence).
The above exemptions last for 5 years.
- Short term extension of time to comply with the letting restrictions – for example, on purchasing a non-compliant property which is let to tenants, the new landlord has a ‘grace period’ from the date of purchase to bring the property up to at least an “E” EPC rating; or where a lease is granted pursuant to a contractual obligation such as an agreement for lease and again there is a ‘grace period’; or where there is a statutory lease renewal under the Landlord and Tenant Act 1954. These exemptions last for 6 months.
There are also the following exceptions (which do not have to be registered on the PRS Exemptions Register):
- Short leases – leases not exceeding 6 months (where there is no previous continuous period of occupation exceeding 12 months and no right to renew)
- Long leases – leases of 99 years or more.
Other landlord and tenant matters
- Premises are not necessarily in disrepair or in breach of statutory requirements if there is a sub-standard EPC rating for the premises.
- Typical service charge provisions will not allow landlords to recover the costs of improvements to the energy efficiency of let premises; since this does not relate to a common part or service.
- Tenants may be prohibited by the lease from carrying out alterations that have an adverse impact on the environmental performance or EPC rating for the premises.
- In relation to rent review, leases often include an assumption that the property can “lawfully be let”, with the intention of disregarding any adverse impact on rental value of the actual lease being unlawful under MEES.
- The impact of sub-standard ratings and what is required to be able to lawfully grant a new lease may have an effect on dilapidations claims for a previous lease in terms of “supersession”. The latter is the principle that a landlord should not recover any damages if any repairs would be superseded by the landlord's proposals to carry out structural alterations to, or demolition of, the premises at or shortly after the end of the lease term.
- The lease may restrict the tenant’s ability to obtain EPCs, with the tenant potentially having to use an assessor suggested by the landlord, or to obtain the landlord’s consent to the assessor that the tenant wants to use.
Future of MEES
MEES obligations are anticipated to become stricter in the coming decade with Government proposals for requirements of a minimum EPC rating of “C” in 2027 and “B” in 2030 (there has been no substantial Government response on this since the consultation was published). When entering into leases now, consideration should be given to potentially stricter MEES ratings during the term of the lease.