This guide contains a brief introduction to the impact of the Minimum Energy Efficiency Standard (abbreviated to MEES) on commercial properties in England and Wales. Different rules apply to residential properties in England and Wales. A separate regime applies to property in Scotland.

In relation to commercial properties in England and Wales, MEES contains two separate requirements: - From 1 April 2018, landlords will not be permitted to grant a lease of a commercial property with an EPC rating below E unless they have carried out all possible cost-effective energy efficiency improvement works, or an exemption applies. - From 1 April 2023, landlords will not be permitted to continue to let a commercial property with an EPC rating below E on an existing lease unless they have carried out all possible cost-effective energy efficiency improvement works, or an exemption applies. The distinction is that the 2018 requirement applies only to new lettings whereas the 2023 requirement will apply to all buildings that are let, even those where leases were granted before 2018.

The regulations that underpin the scheme – the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 – are extremely complex, as we explain below. This is of course only a summary of what they contain.

When MEES will apply

All commercial properties will be subject to MEES if they are of the type that require an EPC and actually have a current EPC. It is thought that MEES will apply where an EPC was commissioned voluntarily (in other words, at a time when there was no requirement to obtain one).

All lettings from 1 April 2018 will be subject to MEES, except for very short lettings (six months or less, up to a maximum of twelve months’ occupation in all) and very long lettings (99 years or more). There is no exemption for intra-group lettings.

Lease renewals will be within MEES. Sub-lettings will also be within MEES.

Sales of properties are not affected by MEES, although buyers of buildings that are let, or intended to be let, will now need to include energy efficiency issues within their due diligence.

Owner-occupation will not be affected by MEES.

What MEES requires landlords to do

From 1 April 2018, where MEES applies, landlords will not be permitted to grant a lease of a commercial property with an EPC rating below E unless they have carried out all cost-effective energy efficiency improvement works, or an exemption applies.

From 1 April 2023, this is extended to all let buildings, including those where leases were granted before 2018.

Cost-effective energy efficiency improvement works fall into two categories: Works that can be wholly paid for by a Green Deal plan. The Green Deal is a financing mechanism designed to enable landlords to pay for energy efficiency improvements and to pass the cost of repayment to their tenants. It is not currently available for commercial properties, and not anticipated to become available in the medium term, so we will say no more about it here.  Works to improve energy efficiency that will pay for themselves within seven years or less. The test is whether the cost of the works will be less than the projected energy cost saving spread over seven years calculated according to a formula in the regulations. It is only necessary to carry out sufficient works to bring the property up to an EPC rating of E, although owners are of course permitted to do more. Where there are no cost-effective works that can be done, or where all cost-effective works have been done and the property is still below an EPC rating of E, the landowner is then allowed to grant a lease. However, the assessment will need to be repeated after five years, as works that are not cost-effective now may have become cost-effective by then, and different types of improvements may then be available.

Exemptions

The legislation contains a number of exemptions but they are not a complete escape from MEES. Most last for only five years, although they can be claimed more than once. The exemption has to be logged on a register that will be publicly searchable (at least in part). This means that buildings for which an exemption has been claimed may suffer a stigma in the letting market even though there is no bar against letting them.

A further disadvantage to exemptions is that they do not pass automatically to a future owner, which means that from 2023 buyers will need to carry out their own investigations and, where appropriate, claim and register a new exemption.

The five year exemptions are:  All relevant energy efficiency improvement works have been carried out, or there are none to be carried out, as explained above.  Consent is required to carry out works and that consent cannot be obtained or is subject to unreasonable conditions. This may be consent from the tenant, or third party consents such as planning consent or consent from a lender. The regulations provide that reasonable efforts have to be made to obtain consent in the case of third parties. No reasonable efforts are required in the case of tenants (so tenants have an absolute right to say no, which will be particularly relevant for the 2023 duty). There is no explanation in the regulations of what constitutes “reasonable efforts”.  An independent surveyor certifies that carrying out the works would result in a reduction in the market value of the property by more than 5%.  A suitable expert states that carrying out insulation works on external walls would have a “negative impact” on the property (presumably by trapping moisture inside the building). There are also a number of short-term exemptions that last only six months. The most important one is the acquisition of a tenanted property by a new owner (which will become relevant in 2023). Effectively this allows the buyer six months before the requirement to comply with MEES applies. At that time the buyer can, if appropriate, claim one of the five year exemptions.

Penalties and enforcement

The MEES regulations specifically state that failure to comply with MEES does not affect the validity of a lease.

As with EPCs, enforcement of the MEES regulations will be carried out by local authorities’ weights and measures departments. Penalties for breaching the legislation will be civil penalties not criminal penalties, but the sanctions for non-compliance with MEES are potentially far more onerous than those that apply in respect of EPCs.

Financial penalties will be 10% of the rateable value (with a minimum of £5,000 and a maximum of £50,000) for letting in breach for less than three months; and 20% of the rateable value (with a minimum of £10,000 and a maximum of £150,000) for letting in breach for three months or more.

SOME PRACTICAL IMPLICATIONS Landlords wishing to let buildings with an EPC rating below E will need advice from an energy consultant or a surveyor with suitable specialist expertise in this area to advise on the types of works (if any) that are required to ensure compliance with MEES.

In some cases, merely obtaining a new EPC may be sufficient to bring a property to E or above, as many assessments were carried out poorly in the early days of EPCs, before assessors became familiar with the EPC software. Conversely, it is possible that re-assessing a property could result in a lower rating, since some of the criteria relating to measurement of energy efficiency were tightened up when the relevant provisions in the Building Regulations were updated recently. Fortunately, it is possible to model any new certificate before it is issued, which will allow different combinations of works to be tested.

The minimum E rating may be raised in the future and so landlords with buildings rated F or G may decide that they wish to spend more than the minimum in order to bring those buildings to D or above.

Where works are being carried out to buildings that are already occupied, landlords will no doubt be keen to try to recover the cost of compliance with MEES from their tenants. In general, subject to specific provisions in individual leases, the expectation is that landlords should be able to recover the costs of repairs, but not improvements, through a service charge. However, where improvements are needed because existing kit is life-expired and can no longer be repaired cost-effectively, these costs may also be recoverable. Legal advice will be needed in each case based on the specific circumstances.

Where landlords own buildings that do not currently have current EPCs, they need to consider carefully the implications of obtaining an EPC before doing so (before, for example, obtaining EPCs for all uncertificated buildings as a matter of course). This is because commissioning an EPC could bring a building within the scope of MEES in 2023 that would otherwise remain outside it.

FURTHER INFORMATION ON MEES The Department of Energy and Climate Change is expected to issue non-statutory guidance on MEES which may answer some of the outstanding questions. No timescale has yet been set for this, but the second half of 2016 seems likely. In the meantime, further information on MEES can be obtained from your Shoosmiths legal advisers. 

Author: Peter Williams, Real Estate Professional Support Lawyer, Shoosmiths LLP Published: April 2016

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