Michael Bennett, Commercial Property Partner

24/02/2022

We are just over a year away from the critical date of 1 April 2023 when Minimum Energy Efficiency Standards (MEES) will be extended to include all existing commercial tenancies.

This is important because it means that a landlord must not grant a new tenancy or continue to let a property unless either:

  1. the property has an Energy Performance Certificate (EPC) rating of at least an E, or
  2. the landlord makes sufficient energy improvements to the property so that it is no longer sub-standard or they can claim a legitimate reason for not doing so.

Failure to comply with these new requirements risks a fine of up to £150,0000 dependent upon property type and the extent of the breach.

Commercial landlords should take action now!

If you are a commercial landlord, now is the time to take action. It would be prudent to undertake an EPC (Energy Performance Certificate) audit of your property portfolio to identify any shortcomings that need to be addressed between now and 1 April 2023. This should be carried out for both properties which are let and those which are intended to be let.

Your questions answered…

What properties do the Minimum Energy Efficiency Standards apply to?

The MEES will apply where the property falls within the definition of ‘non-domestic private rented property’ which means it is:

  • Located in England or Wales,
  • Let under a ‘qualifying tenancy’ (there are exceptions for short tenancies, for example, licence arrangements and ‘long’ tenancies of 99 years or more),
  • Not a dwelling, and
  • Is required to have an EPC

There are certain properties which are sometimes not required to have an EPC, examples of which include listed buildings and buildings in conservation areas, or buildings earmarked for demolition.

How do I know whether my property is sub-standard?

The current benchmark of substandard is where a commercial property has an EPC rating of F or G.

If a commercial property has a valid EPC rating of E or better, it is not sub-standard and the MEES regulations will not apply.

It is worth bearing in mind however, that the EPC regime will be tightened further in the future. From 1 April 2027 it is likely that, subject to limited exemptions, properties will need to have an EPC rating of C before being let.

If you are a landlord instructing EPC improvement works, consider whether for a little extra the rating could be moved up from an E to a D or better.

Are there any exemptions?

The prohibition on letting sub-standard commercial property is not absolute. Landlords can still let or continue to let sub-standard property if the landlord can claim a legitimate reason for not making the required energy efficiency improvements and this has been validly registered on the Private Rented Sector (PRS) Exemptions Register.

The MEES rules on what constitutes a relevant energy improvement are complex, as are the rules around exemptions. Care must, therefore, be taken by landlords wishing to rely on them and specialist advice is recommended.

Most exemptions are valid for only five years and must be registered in the Exemptions Register. Exemptions include:

  • Cost-effective improvements: All cost-effective energy efficiency improvements have been carried out (or there are none that can be made) and the property remains sub-standard. In simple terms, cost-effective means improvements pay for themselves within seven years, based on a rather complex formula in the MEES regulations.
  • Devaluation: An independent surveyor states that making energy efficiency improvements would reduce a property’s value by more than 5%.
  • Tenant consent is withheld: The tenant or a third-party refuses access or consent to the energy efficiency improvements. It remains to be seen to what extent a landlord will be expected to invoke rights of access under the lease to carry out EPC related works – much will depend on the drafting of the lease terms

How should commercial landlords prepare for the introduction of Minimum Energy Efficiency Standards?

Commercial landlords need to consider the following:-

  • Undertaking an EPC audit across the portfolio to identify EPC gaps and deficiencies.
  • Commission EPCs where there are gaps.
  • Commissions EPC plus reports where there are rating deficiencies – while the EPC plus report will not give a definitive cost to bring properties up to the required standard, it can be a useful starting point in terms of the costs involved and the scope of works required.
  • Obtain specialist advice on whether any exemptions can be relied on.
  • Review leases and establish whether and where EPC upgrade costs can be passed through to tenants via service charge or otherwise.
  • Properly scrutinise tenant’s fitting out proposals and alterations to ensure they will not adversely impact a property’s EPC rating.

The introduction of Minimum Energy Efficiency Standards represents a significant change for commercial landlords who face the prospect of a considerable amount of work and expense between now and 1 April 2023.

My advice would be to get to grips with the requirements and how they impact on your properties as soon as possible. It is crucial that you allow ample time to take steps to meet the minimum standards and avoid falling foul of the new regulations.

Please do get in touch with our commercial property team by  emailing enquiry@beswicks.com should you require any advice or assistance on MEES. Alternative, you can phone our Stoke-on-Trent team on 01782 205000, our Altrincham office on 0161 929 8494 or our Birmingham office on 0121 516 3025.