MEES Regulations for Commercial Property – The Countdown is on

As part of the government’s drive towards net zero by 2040, the next stage of minimum energy efficiency standard (MEES) is set to come into force in a year’s time – in April 2023. The new regulations will extend the existing requirement for a minimum rating of EPC E for new tenancies of commercial property to all eligible commercial leases.

From 1 April 2023, it will therefore be unlawful for a landlord to continue to let commercial property that have EPC ratings of F or G, unless an exemption applies and is validly registered.

The MEES Regulations do not extend to:

• short leases of less than 6 months (but a continuous period of occupation exceeding 12 months would bring the Regulations into play);
• leases of 99 years or more; and
• licences.

There is also an argument that Listed Buildings, which do not require an EPC, are exempt from the new rules.

In addition, landlords are not required to carry out improvement works if the cost of the changes required to meet the MEES threshold is not recoverable within a seven-year ‘payback’ period. Other grounds for exemption include improvements that are likely to result in a reduction in the property’s market value by more than five per cent (as certified by a Chartered Surveyor), or improvements which require third party consent, which the property owner cannot reasonably obtain.

It is worth noting that the MEES compliance rules do not transfer with the property upon sale. Therefore, even if an existing landlord has obtained an exemption for a property, the new landlord would need to do the same.

The next twelve months will see many landlords needing to take steps to increase the property’s energy efficiency rating to at least a grade E. Inaction is unlikely to be an option… unless there is a clear exemption based on the type of property or nature of the lease, landlords will need to prove that improvement works are not cost effective, and register an exemption. This would last for a period of 5 years.

The MEES Regulations may clearly present challenges to landlords improve the energy efficiency of their properties by 2022.

The regulation may also have other potential consequences for both landlords and tenants…

Rent increases

Landlords that need to improve their property will incur costs. They may therefore look to try and recoup costs in rent increases. Although, in theory, the tenant would benefit from lower energy bills following upgrades to the property, there could conversely be an argument that the property itself will have increased in value, depending on the nature of the energy efficiency works. Whether any increase in rent could be allowable will depend on the contents of the lease, whether a rent review is due, or whether any increase could be passed on under a ‘service charge’.

Access rights

If a landlord requires access to a property to undertake improvement works, the tenant could make this difficult. Depending on the disruption likely to be caused, or the relationship between the landlord and tenant, gaining access could prove problematic for landlords.

Dilapidations

Most leases will require tenants to reinstate a property to its previous condition prior to vacating. However, where any works have improved the energy rating of the property, landlords will inevitably want to keep these in place. Where a landlord has an outgoing tenant but needs to undertake improvements to lawfully let the premises to a new tenant, it may be that the outgoing tenant’s dilapidations liability could be negotiated seeing that works to the property are pending.

The government have made it clear in a recently published whitepaper that they intend to make it unlawful to continue to let commercial property with an EPC rating of below B by 2030. Landlords will need to be mindful of this in relation to improvements that they make now, being sure to invest wisely. 

If you require any advice in relation to MEES, including on whether an exemption applies to your property, how to deal with new or existing leases in relation to the Regulations, or any potential disputes, please get in touch.

Recognised as a leading firm in the North West and one to watch, O’Donnell Solicitors offer straight talking Legal Services from modern offices in Saddleworth, East Manchester.

To access our Commercial Property services please contact James O’Donnell on 01457 761 320 or email james@odonnellsolicitors.co.uk