Most of those involved in the commercial property sector will be well aware of Part 3 of the Minimum Energy Efficiency Standards (MEES) Regulations which apply to non-domestic private rented (PR) property (a term which will cover most, but not all, commercial properties). These regulations were introduced to effectively incentivise commercial landlords to make energy efficiency improvements to poor performing let properties.
Since 1st April 2018, a landlord of sub-standard non-domestic property (currently, a property with a valid EPC rating of F or G) must not grant a new tenancy. Similarly, from 1 April 2023, they cannot continue to let the property unless sufficient energy efficiency improvements have been made to bring it up to the required standard. If this is not a viable option, the landlord can claim they have legitimate reason for not doing so and register the property on the PRS Exemptions Register. This applies even if the lease was granted prior to the MEES Regulations coming into force in 2018.
Exemptions
There are a number of questions and considerations that must be addressed when assessing if MEES Regulations apply to a specific property;
- Whether or not the property falls within the definition of non-domestic PR property and is required to have an EPC. If not, the MEES Regulations will not apply. Certain types of commercial property, some very long or very short leases, and genuine licences to occupy are excluded.
- Whether the landlord, on or after the relevant date, is letting the property. This is not as simple as it may seem, particularly where the existing letting has expired or been terminated, but the tenant remains in occupation.
- Which works should be done to a sub-standard property before it is let or can continue to be let? The prohibition on letting sub-standard property is not absolute. Landlords are permitted to let a sub-standard property if it still doesn’t meet the required standard even after all the relevant energy efficiency improvements have been made (or there are none that can be made), or if an exemption applies. In each case, the landlord must enter the relevant details on the PRS Exemptions Register to avoid enforcement action.
- Whether an exemption applies. For example, where the ability to undertake improvement works is prevented by third-party restrictions (such as the consent of a tenant, lender, superior landlord, or the planning authority); where improvement works would reduce the market value of the property by 5% or more (as supported by a RICS registered valuer); or where the expected value of savings on energy bills over a 7-year period is less than the cost of carrying out the works/improvements.
Enforcement
It is important to remember that the MEES Regulations do not impose a positive obligation on a landlord to carry out energy efficiency improvements, but work on the basis that landlords will be incentivised to do relevant works so they can lawfully let the property and so avoid enforcement action.
Financial penalties range from £5,000 to £150,000, and although enforcement by Local Trading Standards has been rare so far, many Local Authorities have recently been awarded government funding for enforcement purposes.
The need to carry out energy efficiency improvements to a sub-standard property before it can be let, or an existing lease can be continued, may encourage landlords to introduce provisions into their leases that facilitate the carrying out of the necessary energy efficiency improvements and/or pass the cost of making those improvements to the tenant.
There are a range of other possibilities to consider, however. These include the landlord’s right of entry to install meters and carry out works that may impact the tenant’s business; provisions which minimise the chance of an EPC being obtained by the tenant which may turn out to have a lower, sub-standard, rating; a tenant’s expanded repair obligation requiring it to carry out energy efficiency improvement works (not just repair works) to the property where needed to prevent it being classified as sub-standard; and express assumptions on rent review which may backfire.
The future
The pace of change is set to escalate. Expected on the horizon are Government plans for a phased implementation to raise the minimum EPC rating (currently an E) to a C rating by 1 April 2027 and a B rating by 1 April 2030 in 2-year “compliance windows”. Indications are that MEES duties may also someday be imposed on tenants, especially on tenant fit-outs, together with duties of co-operation; perhaps a new additional temporary exemption for properties let as a shell.
Conventional practice on lease drafting will continue to evolve and it’s too early to tell what will become the norm, but meanwhile, it’s essential for both landlords and tenants to seek expert advice on their respective positions on the grant or renewal of a lease, to avoid unintended consequences and expensive mistakes for both sides.
Should you require impartial, independent advice on the matter, please contact our specialist team for a confidential consultation.
