The Minimum Energy Efficiency (MEES) Regulations 2015 came into force in England and Wales on 1 April 2018 in order to force landlords to improve the energy efficiency of commercially let property. The Regulations apply to all qualifying types of tenancy and property types which are required to have an Energy Performance Certificate (EPC). Broadly speaking all commercial tenancy types are caught except leases of 6 months or less and tenancies for 99 years or more. Furthermore, most commercial properties require an EPC unless they fall within one of the exemptions, e.g. no climate control/heating, some non-residential agricultural buildings, industrial buildings and workshops with low energy demands, temporary buildings, (useful life of not more than 2 years), religious buildings, small standalone buildings which are not more than 50 square metres and buildings earmarked for demolition.
EPC’s give a property a rating from A to G- an “A” being the most and a “G” being the least energy efficient. Once issued, an EPC is valid for 10 years (unless certain types of works are carried out that alter the property’s configuration or heating/climate control system, which would then trigger a requirement for a new EPC), although do note that there is some conjecture that one should be wary of old EPCs with an “E”, or even a “D” rating which are approaching expiry or have expired as the assessment criteria have tightened up considerably since the first EPCs were issued in 2008.
Since 1 April 2018, it has been unlawful to grant a new lease (which includes a renewal or an extension of an existing lease) of a sub-standard commercial property, i.e. one with an EPC rating of F or G. From 1 April 2023, it will be unlawful for a landlord to continue to let any existing leases of sub-standard commercial property. In such scenarios, landlords either have to carry out works to bring the property up to at least an “E” standard or apply for and register an exemption to this requirement.
Exemptions are personal to the landlord, plus they only last for 5 years and then need to be re-applied for. Here are some examples of the exemptions (but note there are more):
• If all relevant improvements that could have been made to improve energy efficiency have been made (or there are none that can be made) and the property is still sub-standard. (Note this is not strictly an exemption under the Regulations but has the same effect.)
• The devaluation exemption- where it is found that energy efficiency measures would decrease the property’s value by 5% or more.
• The 7 year payback exemption- a landlord will only be expected to make energy efficiency improvements that have an expected payback of 7 years or less.
• The consent exemption- where third party consent is needed to works but cannot be obtained.
• The new landlord exemption- new landlords will have 6 months from purchasing the property to either undertake energy efficiency works or if unable to do so to register another exemption.
The penalty for a landlord letting or continuing to let a sub-standard property, and for which an exemption has not been registered, depends upon how long it has been in breach of the MEES Regulations. A breach of less than 3 months carries a fine of whichever is the greater of the following: £5000 OR 10% of the rateable value of the property up to a maximum of £50,000. A breach of more than 3 months carries a fine of whichever is the greater of the following: £10,000 OR 20% of the rateable value up to a maximum fine of £150,000.
Landlords should therefore be mindful of this change coming up on 1 April 2023 and it would be prudent to start to think about whether the EPCs for some properties in their portfolios might need to be redone (due to imminent expiry but only if there is a transaction that triggers the need for a new one, e.g. a sale or new letting) or perhaps re-do them if they are an “E”, or indeed “D” rated as it could be that updated assessment rules the property is in fact an F or G.
So, what happens if you do have or occupy a substandard commercial property? What does this mean for a landlord and what does this mean for a tenant?
As a landlord, there is no positive obligation to carry out works to improve sub-standard property, but if you fail to comply with the MEES Regulations you will be exposed to the liability of enforcement action, which essentially means you should make sure you are compliant in time. Therefore, this means that by 1 April 2023 for property that you are then still renting out, you will have to carry out works to bring the property up to the minimum of an “E” rating unless you can rely on one of the exemptions. It is the landlord’s responsibility to comply with the MEES Regulations and not the tenant’s and it would be rare to come across a lease that seeks to pass this burden on, although it is not completely unknown. Unless there is express provision in the lease, the view also is that the cost of obtaining an EPC (where there is no valid one) is to be borne by the landlord.
Tenants may find themselves being approached by landlords wanting to carry out works to improve the energy efficiency rating of their property, the costs of which may or may not be passed on through service charge provisions in the lease. Current RICS guidance is that only such works that have a “proportionate cost benefit to the tenant” may be passed on through the service charge. Note also that a general clause in a tenant’s lease obliging them to “comply with all laws” does not oblige them to in fact carry out energy improvement works on the landlord’s behalf and also a tenant covenant to keep a property in “repair” does not oblige it to carry out works which constitute more than repair, i.e. which are in fact works of improvement. Either way, the terms of the lease will need to be checked from the landlord’s and the tenant’s point of view in all scenarios. Note also that as a tenant, if your landlord grants you a new tenancy or continues to let a property to you which is sub-standard, this does not mean that your lease is void.
Issues get more complex still when you have a tenant who has in turn sub-let (in which case it is in turn a landlord and so must comply with the MEES Regulations) or is about to sublet or assign a sub-standard property but cannot continue do so unless energy improvement works are carried out. One then has to look to who has liability for what works under the lease and again whether an exemption applies.
Do note also that longer term (the current thinking is by 2030), the government’s current aim is to bring all properties up to a C or possibly even a B rating. So, if you are a landlord about to carry out energy improvement works or indeed an owner occupier that is thinking in the short to medium term about letting out your premises, bear this in mind and bring it up to as high a standard as you can.
The MEES Regulations are complex and the above is a summary only, so please do consult both your legal advisers initially and then a specialist MEES consultant/EPC assessor for further advice.
Note there are similar but separate rules which apply to residential property, but this is outside the scope of this note.