The current MEES regime
Under the current MEES regime, any new or renewal lease, or lease extension, granted in respect of commercial properties in England and Wales must (subject to certain exemptions) have a valid energy performance certificate (EPC) showing an energy efficiency rating for the property of between 'A' and 'E' (with 'A' being the best). Ratings of 'F' and 'G' denote the property as sub-standard in energy efficiency terms.
From 1 April 2023, this MEES standard will extend to all existing commercial leases, even where there is no change in tenancy arrangements.
There is no formal requirement to improve the energy efficiency of a sub-standard property before a sale (although an EPC will be necessary as part of the sale process). However, MEES must be considered where a sub-standard investment property is being purchased, as the property owner or landlord will not be able to grant new leases without raising the property's energy efficiency to an acceptable level. A new landlord will also need to consider whether that cost could be shared with tenants, review any existing exemptions and consider any potential exemptions from the MEES regulations. A buyer of sub-standard property will not inherit any exemption from MEES compliance which has been previously obtained by the seller, and will need to either raise the energy efficiency standard of the property to the permitted level or satisfy the criteria, and apply, for a new MEES exemption.
Proposals for change
The required standards for energy efficiency are in flux. The government's 2020 Energy White Paper, Powering our net zero future, revealed its intention that all rented commercial buildings should achieve an EPC rating of 'C' by 2027, and an EPC 'B' rating by 2030. The change is estimated to affect around 85% of the UK's commercial rented stock, equating to around one million properties. This intention has not yet been formalised, but legislation is expected in due course. Reaching such standards will require a focused fast-tracking of building improvements by landlords, including to heating, lighting, air conditioning and ventilation services. The clock is now ticking on the need to minimise energy wastage and reduce long-term energy consumption to meet net zero targets.
Bearing the cost of MEES compliance
MEES compliance is first and foremost the obligation of landlords, who will usually bear the cost (unless any leases include express provision for tenants to carry out such works or for cost allocation within the service charge). However, tenants who wish to sub-let their premises may also be on the hook for compliance costs, where those premises do not currently have a rating of 'E' or above.
MEES application, carve outs and exemptions
The MEES Regulations only apply where a property requires an EPC (or is a part of a larger building which needs one). Properties exempt from EPC requirements, such as temporary buildings with a planned life of two years or less, and properties (such as industrial buildings) that do not use energy to condition the indoor climate, will not be caught by the MEES regulations. Similarly, listed buildings do not at present need to obtain an EPC if compliance with minimum energy performance requirements would unacceptably alter their character or appearance.
If an EPC is required, then MEES Regulations will apply to all lettings, other than very long (99 year+) leases, or very short leases of six months or less (except where a tenant has been in occupation for a continuous period of more than 12 months).
The MEES Regulations also contain a number of exemptions which permit landlords to let sub-standard property in limited circumstances without fear of enforcement penalties.
Key exemptions are as follows:
- 'All improvements made' - the landlord has made all relevant energy improvements (or none can be made) and the property remains sub-standard.
- 'Seven Year Payback' - the landlord can show that the cost of purchasing and installing a relevant improvement or improvements does not meet a seven-year payback test (i.e., where the works will pay for themselves (through savings in energy bills) within seven years).
- 'Consent' - the landlord is unable to improve the energy rating due to its inability to obtain, despite reasonable efforts, any necessary consent (e.g., from a tenant, superior landlord or planning authority) to carry out the required works.
- Devaluation - an independent surveyor concludes that the landlord cannot improve the property's energy rating without works which would devalue the property by more than 5%.
- 'New Landlord' - temporary six-month exemption where a person becomes a landlord in sudden circumstances (e.g., a guarantor stepping in to take over an existing lease, or a purchaser of commercial premises subject to an existing tenancy).
Exemptions (where available, and save as stated above) last for a maximum of five years, and require registration (supported by documentary evidence) on the government's PRS Exemptions Register. Landlords who benefit from an exemption will need to keep under review any change in the circumstances on which that exemption is based. Once an exemption expires, the landlord will need to have carried out necessary energy works to meet the MEES requirements, or register a new exemption, in order to avoid enforcement action.
Penalties and Enforcement
There are stringent financial penalties and potential reputational damage for landlords who fail to comply with the MEES regime, and the asset value of "sub-standard" properties with an 'F' and 'G' rating is invariably reduced. Local authorities are responsible for enforcing the MEES regulations through compliance notices and fines, though in some cases, landlords may benefit from a six-month grace period to comply with the letting restrictions.
A landlord renting out a non-compliant commercial property (where the MEES breach lasts less than three months) can attract a fine of GBP 5,000 or, if higher, 10% of the property's rateable value, up to maximum of GBP 50,000. Longer-term breaches of MEES regulations trigger a fine of the higher of GBP 10,000 or 20% of the rateable value of the property, up to a maximum of GBP 150,000. Landlords can also be fined GBP 5,000 for submitting false or misleading information to the PRS Exemptions Register, and for failing to comply with a compliance notice.
The enforcement authority can also impose "publication penalties", by entering details about the breach on the publicly accessible part of the PRS Exemptions Register. Such name and shame disclosures constitute potentially damaging adverse publicity for a landlord.
The April 2023 deadline for all existing leases to have a MEES rating of 'E' or above is fast looming, and landlords who have not already done so should be considering taking the following steps to avoid exposure to enforcement action:
- Review their property portfolio to identify properties either with an EPC rating of 'F' or 'G', or without any prior EPC rating.
- If no current rating, appoint an energy assessor to obtain an EPC. Consider updating older, or expired, EPCs to assess whether existing ratings are up-to-date (more advanced methodology may result in a different, possibly lower, rating than was given previously).
- Plan and implement a programme of upgrades and refurbishment works for those properties below an EPC 'E' rating to encompass relevant energy efficiency improvements.
- Consider whether any MEES exemptions will apply, or whether existing exemptions are due to expire. In either case, obtain necessary supporting evidence for exemption and register at an early date.
- Engage tenants - agree what MEES improvements need to be made, and a timetable and methodology for implementation. Disruption to business should be minimised. Consider whether, under the terms of the lease, these works are to be carried out, or the costs borne, by the landlord or the tenant.
- If upgrades do not achieve a minimum E rating consider appropriate next steps or exit strategy.
The impact of MEES legislation will be of ever-increasing concern to both landlords and tenants (and indeed their funders) as companies seek to improve their ESG credentials. Steps are recommended sooner rather than later to address not only the application of MEES to existing leases from 1 April 2023, but also the proposed 2030 minimum 'B' energy efficiency rating (and possible interim uplifted energy rating requirements). Action taken at an early date to lower the carbon footprint of buildings is likely to reap market, valuation and reputational benefits for commercial property stakeholders.
For further guidance on the implications of the MEES regime on your property portfolio, please do not hesitate to contact us.