Commercial Property Landlords – Are you ready for the arrival of the new MEES regulations?

Introduced in 2015, the Minimum Energy Efficiency Standards (MEES) require landlords to achieve a minimum rating of E on their energy performance certificates (EPC) to avoid incurring hefty fines and penalties for non-compliance.

These requirements are set to become even stricter as of 1^st April 2023 with existing leases that were granted before 1^st April 2018 also impacted by the regulations. The aim is to help the UK achieve its net-zero emissions target and the Government has proposed the following:

Many commercial landlords will be forced to undertake vital energy efficiency improvements to their properties, which could be met with resistance if tenants have their operations interrupted as a result. It is likely that many leases may not provide for clauses in respect of EPC or MEES and as a result, landlords could find themselves in a difficult position unless they are given an exemption.

Why is it important?

An EPC offers valuable insight into the energy efficiency of a building, otherwise known as its ‘asset rating’ and is required where a building is to be sold or let. Under the MEES regulations, it is an offence for commercial property owners to grant new leases of sub-standard properties (rating of either an ‘F’ or ‘G’).

The consequences of breaching these regulations can be severe, with landlords facing fines based on 10-20% of the rateable value ranging between £5,000 to £150,000 and significant reductions to the building’s value. Penalties will be enforced by Local Weights and Measures Authority, which was set up with the MEES regulations, and have the power to impose civil penalties.

Considering that most of the commercial property stock currently falls below a ‘B’ rating, it stands to reason that any lease ending in the next ten years will require some form of improvement – the question is how and at what cost to landlords?

Whilst dilapidation claims are a valuable tool for landlords looking to repair a property before reletting it may not be suitable for funding whole building improvements which are expensive to deliver.

To achieve the coveted ‘B’ rating, landlords will need to consider substantial technical changes, swapping outdated mechanical and electrical equipment to more energy efficient alternatives. This may include the following:

 Heating and cooling

• Removing gas in the building – replace with storage heaters or heat pumps.
• Microgeneration – solar PV (useful for high energy usage operations) or wind turbines
• Window shades for overheating

Hot water

• Instantaneous water heater
• Solar thermal

Lighting

• LEDS
• Sensor-controlled lights

Fabric

• New insulation
• Air tightness testing

However, landlords should be mindful that not all EPC improvements work in the same way in different settings.

Exclusions

The requirement applies to commercial properties situated in England and Wales, which is let under a qualifying tenancy and is required to have an EPC.

• What is a qualifying tenancy? It does not include certain tenancies with a term of 6 months or less, or 99 years or more. A “tenancy” is not defined by legislation, and is likely to exclude an agreement for lease or licence.
• What buildings aren’t required to have an EPC? Buildings with no air conditioning or heating, as well as religious, temporary or very small buildings are not required to have an EPC.

Who pays, the landlord or tenant?

The starting point is to review the terms in the existing lease. The lease is likely to impose duties on the landlord to provide certain services and the tenant is likely to pay for these services. It is important to identify whether the lease allows for recovery of any improvements the landlord makes from the tenant.

It is also important to note that the tenant is entitled to peaceful enjoyment of the property without interruption from the landlord, so there needs to be a balance between carrying out the improvements and not disrupting the tenant’s business.

If the lease permits the recovery of the improvement costs, the landlord and tenant should maintain good communication as the improvements will positively impact both parties. Works should be carried out at agreed times, maybe outside business hours or alternatively the landlord could offer a rent-free period.

However, if the parties cannot agree on the improvement works or service charge costs for the improvement, the lease may provide for expert determination or arbitration as an alternative dispute resolution. Finally, as a last resort, if no resolution follows, the First Tier Tribunal will determine the level of service charge due.

Exemptions

Whilst most landlords will need to consider making property improvements, others can avoid falling foul of the MEES regulations through an exemption by registering a legitimate reason on the ‘Private Rented Sector (PRS) Exemption Register’ for not providing an energy rating of E or above. Some of the most common exemptions include:

• 7 year payback exemption – where a landlord can show that the cost of carrying out the improvements will not be recovered within 7 years. The exemption will last 5 years and after this time the landlord must try again to improve the property’s EPC rating to meet the minimum level of energy efficiency. If this cannot be achieved, then a further exemption may be registered.
• All improvements made exemption– where a landlord has undertaken ‘all relevant energy efficiency improvements’ but the property remains sub-standard. Again, the exemption lasts 5 years.
• Wall insulation exemption – acknowledgement that certain wall insulation systems may not be suitable in certain situations.
• Consent exemption – where a landlord has been unable to obtain consent from a superior landlord, a tenant or a lender to carry out the energy improvement works. To qualify, the landlord must have used all reasonable efforts to obtain such consent and the exemption lasts 5 years.
• Devaluation exemption – where an independent surveyor confirms that the relevant improvements will cause the market value of the property to fall by more than 5%.
• New landlord exemption – temporary exemption for a new landlord. The exemption lasts 6 months from the date they become a new landlord.

Without one of these exemptions, MEES compliance is mandatory.

Immediate action required…

April’s deadline is fast approaching as is the UK’s ambition to achieving net-zero. The Government may decide to up the ante once the regulations change, becoming more consistent with how and when they enforce it. Therefore, it is vital that landlords review their existing property portfolios and EPC ratings now, taking steps to improve the energy efficiency of any properties that may soon be deemed as ‘sub-standard’ – the journey to achieving compliance will be made much simpler if such action is taken earlier.

For commercial landlords who wish to explore the options available to them, Newmanor Law has a team of experienced commercial property lawyers to advise on green leases and potential acquisitions or grant of leases with EPC considerations.