Commercial Property MEES changes

The recent implementation of legislation relating to minimum energy efficiency standards (“MEES”) of commercial properties is something that all landlords, investors, developers, and tenants should be aware of. Non-compliance with the latest requirements could result in penalties of between £10,000 and £150,000 calculated on the rateable value of the property and details of the breach may be made publicly available, with consequential adverse publicity.

Since 1 April 2018, landlords have been prohibited from granting new commercial tenancies, or extending or renewing an existing tenancy, if the property is sub-standard unless the property benefits from an exemption which is registered on the PRS Exemptions Register. From 1 April 2023, landlords are prohibited from continuing to let any commercial property that is sub-standard. A commercial property is sub-standard if it has an energy performance certificate (“EPC”) rating of F or G.

It is no secret that the Government intends to review the MEES requirements again in the near future, having signalled its intention to increase the minimum energy efficiency standard to band C by 1 April 2027 and band B by 1 April 2030.

In circumstances where there is a legitimate reason or an exemption applies, it may be possible for a commercial property which is sub-standard to be let or continue to be let.

Exemptions

The following exemptions (including legitimate reasons) are available: -

• where a property remains sub-standard despite all relevant energy efficiency improvements having been carried out or there are none that can be made;
• where a recommended improvement need not be carried out as the cost would be more than the savings on energy bills over a seven-year period;
• where consent cannot be obtained from the tenant or a third party for the works to be carried out;
• where a recommended wall installation would have a negative impact on the fabric or structure of the property;
• where the relevant works would devalue the market value of the property by 5% and this is supported by an independent valuation; and
• a six-month exemption for new landlords in specific circumstances.

Exemptions must be registered on the PRS Exemption Register to avoid enforcement action. It should be noted that exemptions are time limited and will not last more than five years. They are also personal and cannot pass to successor landlords.

It is vital to ensure that any exemptions are registered, as publication of any breach of the regulations on the PRS Exemption Register could potentially expose a landlord to the risk of reputational damage.

The MEES requirements do not apply if the property is not required to have an EPC (as whether a property is substandard or not is determined by reference to the rating of a valid EPC). Properties that are not required to have an EPC can include industrial sites with a low energy demand, listed buildings but only in certain circumstances, temporary properties and holiday accommodations that are used for less than four months of a year. It is always recommended to check whether a property has or ought to have a valid EPC.

The MEES requirements also do not apply to properties occupied under a licence, short leases (being leases which are less than six months unless there is an option to renew, or the tenant has already been in occupation more than twelve months) and long leases (being tenancies which are for a term of more than 99 years).

Tips for landlords

• Check properties have a valid EPC rating of E or above.
• Where properties are sub-standard, review whether you have a right of access and are able to carry out works under the terms of any subsisting lease.
• Landlords should note that the right to access a property to carry out energy efficiency works is not automatic and will depend on the terms of the lease. If there are no express rights under the lease, then the tenant’s consent will be required.
• Ascertain whether the costs of the works relating to the energy performance of the property can be recovered from the tenant under the terms of any lease.
• Ascertain whether any exemptions or legitimate reasons are available and ensure they are registered and diarise their expiration dates for future review.
• For new leases, ensure that there are sufficient rights of access to enable energy efficiency works to be carried out.

Tips for lenders

• Carry out similar checks and measures to those of the Landlord above.
• Consider the current and future MEES requirements as part of its lending and valuation criteria and monitoring of existing securities.

The prohibition against letting or continuing to let a property that is sub-standard, or which may become sub-standard under future MEES regulations may: have a detrimental effect on open market value with consequential increase of loan to value ratios; reduce the rental income of the property; increase capital expenditure for the borrower; and adversely affect the sale of property in the event of enforcement of the lender’s charge.

Tips for tenants

• When considering taking a lease of commercial property, ensure that the property has an EPC rating of E or above.
• When negotiating the terms of a new lease, check to see whether the cost of energy improvement works are included in the service charge and if so, ensure that the same are reasonable.
• Be aware of the landlord’s right (if any) to enter the property to carry out energy improvement works.