Minimum Energy Efficiency Standards for Commercial Landlords

The Minimum Energy Efficiency Standards (MEES) set out a minimum level of energy efficiency for private rented property in England and Wales.

A property will be deemed “sub-standard” for the purpose of MEES if it has an Energy Performance Certificate (EPC) rating of below E.

Key dates and provisions

To date, the EPC rating for a property has served as a useful indicator of environmental efficiency. However, come the introduction of MEES in April 2018 the EPC rating for a property will take on additional and increased significance:

From 1 April 2018: It will be an offence to grant, extend or renew a lease of a commercial property with an EPC rating of below E.

From 1 April 2023:  It will be an offence to continue to let a commercial property with an EPC rating of below E.

Limited exceptions and exemptions will apply and are outlined below.

A slightly different MEES regime will apply to residential lettings (a separate briefing is available) the most notable difference being that the restriction on continuing to let residential property with an EPC rating of below E will come into effect in April 2020, a full 3 years earlier than that outlined above for commercial property.

Commercial lettings outside of MEES

MEES will not apply to commercial buildings that do not require an EPC, for example, industrial sites with a low energy demand, places of worship, small standalone buildings (total floor area of less than 50 square meters) and temporary buildings.

MEES will not apply to commercial leases of less than 6 months or more than 99 years and will not apply to a licence agreement or occupation under an agreement for lease.

Exemptions

It may not be practical or possible for the environmental performance of a substandard property to be improved.  Accordingly, a commercial property will be exempt from MEES if one or more of the following exemptions apply:

Relevant improvements exemption: Where all “relevant” energy efficiency improvements (i.e. those listed in a recommendation report or other survey) have been made, or there are no such improvements that can be made, and the property remains sub-standard.

Golden rule exemption: Where the relevant energy efficiency improvements would not pay for themselves in energy savings over the course of the next 7 years.

Devaluation exemption: Where the relevant energy efficiency improvements would decrease the market value of the property by more than 5%.

Consent exemption: Where the landlord requires the consent of a third party (such as a superior landlord, mortgagee, planning authority or a tenant) to undertake energy efficiency improvements and such consent cannot be obtained despite the landlord’s reasonable efforts to obtain it.

New landlord exemption: Where a landlord is required to grant a new lease of a sub-standard property pursuant to an agreement for lease, or court order (including a statutory renewal under the Landlord and Tenant Act 1954).

Registrations and validity of exemptions

Exemptions must be applied for and registered together with supporting expert evidence as appropriate.

With the exception of the new landlord exemption (which applies for 6 months) exemptions will apply for 5 years after which the landlord will be required to improve the EPC rating or apply for and register a further exemption.

Exemptions will not pass to a new owner on the sale of the property and if a let property with a sub-standard EPC rating is sold with an exemption in place, the new owner will need to improve the EPC rating or register its own new exemption within 6 months of the purchase.

Potential penalties

New leases of commercial property granted or continued to be let in breach of MEES will remain valid.  However landlords that let commercial properties in breach of MEES may face significant fines:

• If a property has been let in breach of MEES for less than 3 months the fine will be 10% of the rateable value of the property (subject to a minimum of £5,000 and a maximum of £50,000).
• If a property has been let in breach of MEES for more than 3 months the fine will be 20% of the rateable value (subject to a minimum of £10,000 and a maximum of £150,000).
• If a landlord has registered false or misleading information on the exemptions register a fine of up to £5,000 may be imposed.
• If a landlord fails to comply with a compliance notice a fine of up to £5,000 may be imposed.

These fines apply in addition to a publication penalty which could result in a fine up to £150,000 per property per breach.

Preparing for MEES

Landlords should ascertain which properties, if any, within their portfolio may be sub-standard and assess the steps that may need to be taken to ensure that any such properties can continue to be let beyond 2018 in compliance with MEES.

Commercial properties with an EPC rating of F or G: Landlords should ensure that the EPC rating is improved where possible and that a new EPC is obtained or that an appropriate exemption is registered.

Commercial properties with an EPC rating of A to E: Landlords should not be complacent. Consideration should be given to changes that may have occurred not only to the energy efficiency of the property since the date of the EPC, but also the current methodology and standards likely to be applied to calculate a new EPC.  There are notable examples of new EPCs generating ratings that differ greatly to those granted when EPCs were first introduced some 10 years ago.

Whilst we have yet to see the emergence of a set of “standard” MEES clauses in new commercial leases,  we are beginning to see the emergence of specific lease clauses to cater for MEES particularly where the lease term will run beyond April 2023. The nature of such clauses will vary depending on a number of factors including:

• The current EPC rating for the property to be let.
• The relative bargaining strengths of the potential parties.
• The impact that such clauses could have on the marketability of the lease and any future rent review.

The potential impact of MEES is not limited to new leases. MEES may well play a significant role in a number of areas within an existing landlord and tenant relationship including:

• Rent review
• Dilapidations
• Alterations
• Reinstatement
• Lease renewals