From April 2018, a new minimum energy efficiency standard (MEES) will apply to certain rented commercial buildings primarily affecting landlords, but also investors, lenders, developers and tenants.

Meeting the prescribed minimum level of energy efficiency for non-domestic private rented property – currently EPC grade E – makes sense on many levels. An estimated 20% of the current rental stock is EPC grade F or G and so is sub-standard. Bringing these properties up to the MEES standard will help reduce energy costs, fuel consumption and greenhouse gases, as well as improving property values and providing employment.

But meeting the new standard will cost money, and, like Brexit, time is running out.  From 1 April 2018, if MEES applies, it must be met before a new lease (or a renewal of an existing one) can be issued and, from 1 April 2023, before the property can continue to be let. Further, MEES is not set in stone and the requirements may be increased over time.

Where does MEES apply?

 Not all properties are subject to MEES and there are a range of exemptions which may – at least temporarily – apply. Broadly speaking, MEES applies only to properties which are required by law to have an EPC. So, MEES will not apply, for example, to buildings such as non-residential agricultural buildings or workshops, which have a low energy demand.   Properties which are let for less than six months (subject to conditions) or for more than 99 years are also excluded.

What exemptions apply and for how long?

Where and for so long as an exemption applies, property can continue to be let even if it is sub-standard. The exemptions include:

• Where reasonable steps have been taken to obtain any required third party consent (e.g. planning permission, or consent from a superior landlord, tenant or lender) for the works without success;
• where independent surveyors advise that the works would reduce the market value of the property by more than 5%;
• where the works would not pay for themselves by energy cost savings within seven years, or that all relevant works have been done, or that there are no relevant works which could be done;
• in specific cases only, where a person has recently become a landlord, for example where it had no choice but to grant the lease – this exemption will apply for six months.

It should be noted that the first three exemptions apply for a maximum of five years. This is reasonable as circumstances change and improvements become more practicable and, one would hope, cheaper. However, they do not transfer to a subsequent landlord. The transferee must establish that it or another exemption applies which will increase compliance costs.

What are the penalties for breach

There are significant penalties for breach.  The Local Weights and Measures Authority may levy fines by reference to rateable value (between £5,000 and £150,000 for a single breach) and may publish details of the breach(es) which may cause reputational damage.

Note that the lease is otherwise still valid and enforceable, notwithstanding the breach or imposition of a penalty.

Landlords may appeal against penalties to the First Tier Tribunal, For example, where the penalty notice was issued in error or that it did not comply with the regulations.

Who should be concerned?

MEES affects investors, lenders, tenants and in particular, landlords of commercial properties. Sub-standard property may become harder to let or sell without significant price or other concessions or delay and landlords may suffer voids whilst required works are carried out or the property cannot be let.

What should be done now? 

• Check, with appropriate advice, whether or not MEES applies and look critically at existing EPCs with a level of F or G in case they are flawed;
• where MEES applies, carry out an audit and secure supporting evidence to determine whether or not one or more of the exemptions can be relied on and register them;
• in particular, where the property is already let, consider whether or not the terms of the lease allow the landlord to enter to carry out the works, bearing in mind a possible breach of its covenants for quiet enjoyment and the likely reluctance of the tenant to permit access where it will suffer disruption to trade);
• if an exemption applies, it must be registered, along with relevant information, on a new centralised and self certified PRS Exemptions Register (which is scheduled to be open from 1 October 2017 but voluntary registration is possible now as part of the pilot scheme by e-mail to the BEIS minimum standards team).  Note that some information on that register will be open to the public as well as the Local Weights and Measures Department as the enforcing authority;
• if the property is already let, check whether or not the terms of the lease allow the landlord to recover any of the cost through service charges or other provisions;
• keep MEES under review, as circumstances and requirements are likely to change;
• in the case of new lettings, consider an agreement for lease/lease provisions:
  1. specifying minimum energy efficiency standards/requirements for fit out works;
  2. allowing the landlord to enter to carry out necessary works;
  3. requiring the tenant to carry out or to pay for those works. Some leases, like the Model Commercial Lease which is increasingly being used, provide that the tenant is to pay for upgrading works where (in the tenant’s absolute discretion) it consents to them being carried out. This is perhaps reasonable as the tenant will benefit from lower energy costs. If the tenant refuses, the landlord may be able to rely on the ‘lack of consent’ exemption;
  4. prohibiting tenants from applying for a new EPC which may have a lower rating (unless they are otherwise required to do so e.g. to sublet or assign) or carrying out works which would reduce the EPC rating of the property;
  5. restricting or prohibiting subletting – one of the trigger points for an EPC;
  6. which assume on rent review that the property may lawfully be let . In effect, assuming that MEES has been met as what is the value of a property which cannot be let; and
  7. (from the tenant’s point of view) requiring the landlord to carry out works to upgrade the property and at the landlord’s cost, especially where the tenant may wish to sub-let sub-standard property. Landlords should be cautious though as the MEES standard (and hence their exposure) may increase over time.

Commercial factors will of course play a part in determining to what extent such provisions are acceptable to the parties.

Recommendations

With the implementation of MEES just a matter of months away, parties should ensure they are familiar with the new laws and understand fully how their properties will be affected – and what action needs to be taken now. Failure to understand the impact of MEES is no defence and could result in increased costs and/or non compliance at a later date.

Further reading: The government’s guidance note, published in February 2017, aims to help landlords, freehold investors, lenders and enforcement authorities to prepare for the MEES Regulations and can be access here:- http://bit.ly/2kPFWnv