Countdown to compliance with MEES: ‘continuing to let’ commercial property from 1 April 2023
Legal Development 28 February 2023 28 February 2023
UK & Europe
UK Real Estate Insights
From 1 April 2023 the next phase of the Minimum Energy Efficiency Standard (MEES) regulations will come into force. This extends the scope of MEES from new leases of ‘sub-standard’ commercial property to existing leases of ‘sub-standard’ commercial property, in some cases, granted many years ago.
The upcoming MEES milestone makes it unlawful for a landlord of a commercial property to ‘continue’ letting a property with an EPC rating of F or G (a ‘sub-standard’ property) unless:
- the landlord registers a permitted exemption on the PRS Exemptions Register (Register); or
- all relevant cost-effective energy efficiency improvements have been made (or none can be made), the EPC rating remains below an E and an exemption to this effect has been registered.
Commercial landlords should urgently audit the energy efficiency levels of all let property within their portfolio and carry out all relevant improvement works and/or register an exemption.
MEES do not apply to:
- Leases for a term less than 6 months (assuming no right of renewal and that the tenant has not already been in occupation for more than 12 months), tenancies at will or licences.
- Leases for a term over 99 years.
- Buildings not required to have an EPC, such as industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary buildings and buildings due for demolition.
- Buildings where the EPC is over 10 years old or where there is no EPC. Note that the grant of a new lease is likely to trigger the requirement for an EPC to be provided and bring MEES into play.
The following permitted exemptions are available for landlords:
- ‘7 Year Payback’: Where the expected value of energy bill savings from recommended energy efficiency improvement works over 7 years (from completion of the installation) are less than the cost of those works. Three supporting work quotes and costs calculations will be required.
- ‘Consent’: Consent to the recommended improvement works cannot be obtained from a third party or is subject to unreasonable conditions. Third parties include planning authorities, mortgage lenders, superior landlords and tenants. Note that landlords must use reasonable efforts to obtain the consent and provide evidence of any refusal.
- ‘Devaluation’: An independent RICS surveyor certifies that the implementation of specific improvement works would reduce the market value of the property (or the building it forms part of) by more than 5%. A landlord must still implement any improvement works not covered by the exemption.
- ‘New landlord’: A 6-month exemption for new landlords who purchase a sub-standard property which is already let, during which period the landlord must carry out all relevant improvement works and, if the property still remains sub-standard, register a valid exemption.
- ‘Wall Insulation’: Certain insulation systems may negatively impact the fabric of a property and cannot be required even where recommended. Expert advice must be support this.
Exemptions (except the ‘new landlord’ exemption) only last for 5 years and must be reapplied for after expiry. They cannot be transferred to successors.
Where a landlord ‘continues’ to let a sub-standard property, it will breach MEES. Local Weights and Measures Authorities (part of Trading Standards) can impose financial penalties of up to £150,000 based on a property’s rateable value. Non-compliant landlords may also be ‘named and shamed’, causing reputational damage.
The government has signalled its clear intention to raise the MEES threshold for commercial properties to a B rating by April 2030, with a possible staged implementation requiring a C rating by 2027.
Whilst these proposals have not yet been made into law, if passed they will have a dramatic impact on many commercial landlords as it is notoriously difficult to achieve an EPC rating of B (or higher).
The environmental credentials of commercial landlords are being scrutinised in a way never seen before and widespread commitments to ESG investment are being made. The energy efficiency of buildings is increasingly taken into account in valuing property. Landlords must act now to improve the energy efficiency of their properties. Ultimately such steps will prove crucial, not only for the retention of existing and attraction of new tenants, but for any financing and sale of property in the future.
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