Anna Ralston-Crane and Michael Cox look at whether the enforcement of the government’s MEES policy is working, and what this means for investors in commercial property.
Eight years and four prime ministers ago, the government introduced the Minimum Energy Efficiency Standard Regulations in England and Wales.
In 2018, the MEES regulations outlawed the granting of new tenancies – or the extension or renewal of existing tenancies – for non-domestic private rented properties with an energy performance certificate rating of F or G.
In April 2023, an additional restriction kicked in. Landlords are now completely barred from letting non-domestic properties with an F or G rating, unless certain limited exemptions apply.
Landlords who fall foul of the MEES regime may face financial penalties, typically based on a percentage of the property’s rateable value, or face censure through potential publication penalties.
Zero engagement
CMS acts for commercial landlords in all sectors across England and Wales. Our experience is that there has been almost zero engagement with the non-domestic MEES regulations by the local authorities that are meant to enforce them. To find out whether this was the case more widely, we gathered some data.
Over the summer of 2023, we approached 285 local authorities in England and Wales with a freedom of information request, to find out how they have been enforcing the MEES rules and how many penalties they had issued.
The answers were startling. Of the 208 local authorities that responded, only five confirmed that tenants had reported breaches, and only one had ever issued a compliance notice. Not a single authority could confirm that it had issued a penalty.
The number of F and G-rated properties has fallen in recent years (see box, below). But there are still plenty for local authorities to investigate. So, why are they not doing so?
F or G? Just ForG-et about it…
Local authorities mostly have a reactive rather than proactive approach to enforcing the MEES rules. By our calculations, 82% take an “intelligence-led approach” – meaning they wait for complaints from tenants before initiating MEES-related investigations.
As one council told us: “There has been no intelligence received to indicate this is an area [where] we need to use our resources, as such no inspections have been carried out.” In the words of another, MEES enforcement is “not a current service priority”.
It is also clear that while councils are content to wait for intelligence, tenants are not rushing to report their landlords.
Tenants occupying a non-compliant property on advantageous terms may often be content to let sleeping dogs lie, especially if they do not have their own ESG reporting goals. In some cases, the fact that an intelligence-led approach relies largely on a tenant’s knowledge and understanding of the MEES regulations – or lack thereof – will also inhibit reporting.
We have heard other reasons suggested anecdotally for non-enforcement, including the theory that certain councils are reluctant to pursue offending landlords because buildings that they themselves own and let may be non-compliant. But a simpler explanation is more likely in most cases: enforcement is not happening because no one in the system has a sufficient incentive to make it happen.
A policy “in due course”
MEES enforcement may not currently be troubling the commercial property market given the dwindling F and G-rated property stock and the absence of enforcement by local authorities. However, this is likely to change as the minimum standard increases and more non-domestic properties become sub-standard – but when will this be?
When MEES was introduced, the government’s ambition was for all non-domestic private rented buildings – other than those with exemptions – to have an EPC rating of B or higher by 2030.
The government launched two consultations on how to achieve this. The second of these proposed an “interim milestone” which would require all affected properties to have a C or better rating by 2027. But that consultation closed in June 2021 and no policy framework has yet been forthcoming.
In October 2023, the government indicated that it will publish its policy “in due course”, after ensuring that “it remains fair and appropriate for landlords and tenants”. Importantly, though, it concedes that “the proposed timelines within the original consultation will require updating to allow sufficient lead in time for landlords and the supply chain”.
While this implies that the broad direction of travel will remain, it also suggests the C milestone will be delayed from 2027 (if it is not scrapped altogether) and that the final B target date is likely to be pushed back from 2030.
As this follows on the heels of the prime minister’s announcement that similar policies relating to domestic properties will be scrapped, this has convinced some commentators that MEES is not a government priority. Certainly, given the pace of change to date, a new policy may not appear for some time – perhaps not before the next general election.
Even if a new policy is introduced (whether by this government or another), will local authorities rush to enforce it?
The evidence so far suggests that there are ample grounds for scepticism. Some landlords, reluctant to incur the cost of upgrading or faced with other difficulties, will already be assessing how much risk there would be in simply not complying.
How could a government do more to encourage cash-strapped local authorities to engage with MEES? Modifying the system so that councils could keep some or all of any penalties levied is one potential incentive.
In 2021 the government ran a compliance and enforcement competition for local authorities, to provide funding that would support MEES enforcement for domestic properties. A total of 59 councils received grants of up to £100,000 each. A similar initiative for enforcement in non-domestic properties might lead to more activity on the part of councils.
It is clear that unless there are some significant changes to the system, local authorities will struggle to police the anticipated higher MEES threshold when – or perhaps if – it is finally introduced.
The market and MEES
Putting the enforcement data and political landscape to one side, the energy efficiency of commercial buildings nonetheless continues to evolve and improve. Many landlords, often driven by their own ESG requirements and goals, already understand the need to make improvements. Many occupiers want sustainable properties to support their own ESG credentials, and properties with low EPC ratings will find it increasingly hard to attract tenants. Market forces are certainly supplementing (and likely overtaking) the government’s MEES regime in any event.
How many buildings are we talking about?
In 2015, the government said there were about 1.2m non-domestic rental properties, around one in five of which had an F or G certificate. Since the introduction of the MEES regulations, the number of EPCs with an F or G rating lodged on the Energy Performance of Buildings Register each year has fallen dramatically. In 2015, there were nearly 4,600 F-rated EPCs and more than 5,700 G-rated EPCs newly lodged on the register. In contrast, in 2022 fewer than 900 F-rated and 1,000 G-rated EPCs were lodged. The numbers for 2023 look set to be even lower: in the first three quarters, only 515 new F-rated EPCs and 597 new G-rated EPCs were lodged. But recent research from Search Acumen suggests there are still some 19,000 commercial rental properties with non-compliant ratings, representing 5% of leased commercial stock across England and Wales. While the number of F and G-rated properties has dropped, the numbers are not small enough to explain the lack of enforcement action.
Who are the enforcers?
The non-domestic MEES rules are meant to be enforced by local weights and measures authorities. In practice this means a council’s trading standards team. Most of the councils that gave us this information said their trading standards teams were responsible. But a number of others said that enforcement was a housing standards or regulatory services issue. Whichever unit is responsible, the issue of resourcing is critical. A number of authorities cited a lack of staff or limited resources more generally as a reason for not conducting enforcement. For many, the root of the problem is budgetary – according to the Institute for Government, local authority spending power in 2021-2022 was 10.2% below its 2009-2010 level.
Anna Ralston-Crane is a partner and Michael Cox is a senior associate in the real estate disputes team at CMS