New MEES Regulations launching on 1st April 2023; Guidance for Commercial Property Landlords

With growing concerns about climate change, there has been an increased focus on improving the energy efficiency of our buildings. The introduction of the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962), more commonly known as the “MEES Regulations”, eight years ago had the intention of improving the energy efficiency of private rented property in England and Wales. “MEES” is short for “minimum energy efficiency standard” and the current standard that a property should meet is an energy performance certificate (EPC) rating of “E” or above, unless the property is eligible for an exemption from the requirements. There are plans to increase this benchmark for privately rented commercial properties to a rating of “B” or above by 2030, however these plans are still under review.  Amy Cushing, Licensed Conveyancer in our Commercial Property department, explains more here about the upcoming changes and what action landlords should be taking.

What are the changes to Energy Efficiency Regulations for commercial property landlords?

Whereas previously the MEES Regulations prevented a landlord of a commercial property from granting a new letting without holding an EPC with a rating of “E” or above or a valid exemption, from 1^st April 2023 landlords will no longer be permitted to continue to let a commercial property without an EPC with a rating of E or above, unless there is a valid reason for not having one as permitted by the MEES Regulations.

Commercial landlords will therefore need to act immediately, taking the following actions:

• reviewing their portfolio to assess the EPC ratings of their commercial properties and to determine which of their properties require a new EPC;
• consider making cost-effective improvements to their properties in order to meet the new requirements, taking into consideration that the property may be held to a higher standard again in the future, meaning that making even greater improvements now may be beneficial and increase the property value; and
• registering an exemption if applicable.

Why should commercial property landlords comply with the MEES Regulations?

Ensuring that your property is as energy efficient as possible will play a part in tackling climate change and creating a sustainable environment, and it may facilitate a number of other benefits such as increasing the value of the property to a potential tenant or investor. Given that these regulations will be coming into effect and seemingly will only become increasingly stringent over time, a tenant or investor is likely to be cautious about investing in a sub-standard property that will require considerable investment to bring up to standard. There is also a market for sustainable properties with some companies pledging to operate as sustainably as possible meaning that an energy efficient property would be in demand.

What happens if landlords don’t comply with the MEES Regulations?

Although non-compliance with the regulations is not a criminal offence, if you choose to let the property or to continue an existing letting that has a sub-standard EPC rating without making the relevant improvements, and you do not have a legitimate reason for failing to make those improvements (which has been validly registered on the PRS Exemptions Register), then you will run the risk of enforcement action.

Enforcement action can include fines and adverse public exposure.

Penalties of up to £150,000 can be issued if you continue to let a substandard property for three months or more without a valid exemption, and the level of the fine issued would depend on the type of property involved and how long you have been in breach of the regulations. Where there has been a non-compliance for three months or more, the penalty would be the greater of £10,000 or 20% of the rateable value of the premises up to the £150,000 limit. Given that these penalties can apply to each lease that a landlord grants, the fines can be particularly onerous if multiple leases of a building have been granted without the relevant EPCs, and the potential ramifications of this should therefore be considered carefully.

There is the possibility that a landlord who has breached the regulations may be listed on the public part of the Private Rented Sector Exemptions Register, thereby causing you reputational damage.

Finally, if a potential investor realises that the property does not reach the minimum standards required, then the value of the property may decrease as they would need to factor in the cost of the works required to bring the property up to standard.

When is an EPC not required?

An EPC is not required if any of the following apply:

• all cost-effective energy efficiency improvements have been made (or there are none that can be made) and the property still does not reach the minimum EPC rating of E; or
• the improvement works undertaken to comply with the MEES Regulations will not pay for themselves through the associated energy savings within seven years; or
• the consent of a third party to the improvement works is required but refused. There may be instances where the consent of a local authority is required, or if there is a tenant in occupation or a mortgagee in existence, then their consent may be required to the improvements. If such a party exists and declines to provide their consent, then this exemption applies as long as the landlord has used a reasonable amount of effort to obtain the consents; or
• the improvement would damage the property or result in its devaluation by 5% or more (or of the building of which the property forms part). If this exemption is to be relied upon, then an independent survey should be obtained in which a suitably qualified surveyor confirms that the improvements would result in the loss of value; or
• in certain limited circumstances, if someone becomes a landlord suddenly and it would be unreasonable for them to have to comply with the regulations immediately. In such instances, there is a temporary six month exemption available to such qualifying landlords.
• the cavity wall insulation, external wall insulation, or internal wall insulation (for external walls) which would be required to improve the energy efficiency rating of the property is deemed by an expert (who puts their opinion in writing) to not be an appropriate measure for the property due to its potential negative impact on the fabric or structure of the property (or the building of which the property forms a part); or
• the property is one of the limited types of property which do not require an EPC. These include:
  • listed buildings (if the minimum energy performance requirements would unacceptably alter it),
  • a temporary building only going to be used for 2 years or less,
  • a property used as a place of worship or for other religious activities,
  • an industrial site, workshop or non-residential agricultural building that doesn’t use much energy,
  • a detached building with a total floor space under 50 square metres,
  • or a property that is due to be demolished by the seller or landlord and they have all the relevant planning and conservation consents.
• leases of less than 6 months in duration are exempt from the EPC regulations, as long as the tenant has not already been in occupation for more than 12 months and the lease does not contain an option to renew or to increase the term beyond 6 months. Any tenancy of more than 99 years duration is also exempt.

If any of the above apply, as a landlord, you should update the PRS Exemptions Register to avoid enforcement action.

Exemptions are time limited and won’t often last more than five years, meaning that landlords should be vigilant to ensure that there exemption remains valid.

Do MEES Regulation exemptions apply if I buy or acquire a property?

Exercise caution as the MEES Guidance says that exemptions cannot be passed one from landlord to another. If you purchase a property that does not meet the standards required, then you will not be able to rely on the seller’s exemption. This will not automatically transfer to you, and you will need to satisfy yourself that the property is legitimately below standard and is eligible for an exemption before you negotiate and acquire the property. Once you have acquired the property, you will need to register your own exemption.

As outlined above, there are some instances in which a new landlord who has just acquired a property can register a six month exemption in order to give them time to bring the premises up to the required energy efficiency standard.

How can our Commercial Property team help?

This is an important change for commercial property landlords and we are here to assist you.  We can discuss the implications of the MEES Regulations and work with you to ensure that your leases include sufficient rights of access to enable you to comply with the regulations. Our expert lawyers can advise and assist you in drafting your commercial property lease to ensure that you are able to recoup some of the costs associated with the regulations via the service charge provisions in the lease. Additionally, we can also discuss wider environmental issues and sustainability issues with you, including ‘green lease drafting’. A green lease is an agreement between a landlord and their tenant to comply with specific responsibilities and obligations to minimise carbon emissions arising from the sustainable development, operation, and occupation of the property.

To discuss the changes with a member of the team, contact us today on 01794 328688 or email info@parkerbullen.com.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.