With changes on the horizon for the application of the Minimum Energy Efficiency Standard Regulations to commercial properties, Kate Symons answers the key questions.
What are the current obligations under the MEES Regulations for commercial landlords?
The aim of the Minimum Energy Efficiency Standard Regulations is to oblige landlords to improve the energy efficiency of their buildings. They do this by prohibiting a landlord of a commercial property from granting a lease to a new or existing tenant if the property has an energy performance certificate rating below E (termed “sub-standard” for the purpose of the MEES Regulations), unless the landlord has carried out all possible cost-effective energy efficiency improvement works and the property remains sub-standard, or an exemption applies. This requirement has been in place since April 2018.
How will this change in 2023?
From April 2023 a further requirement will come into force meaning that where a commercial property is already let, and has an EPC rating below E, the landlord may not continue to let the property, unless it has carried out all possible cost-effective energy efficiency improvement works, again subject to qualifying exemptions. Landlords of properties that do not meet this standard will be required to take steps to improve the EPC rating of the property to E or above or, if this is not possible, will need to claim and register an appropriate exemption by 31 March 2023.
Do MEES apply to all commercial properties?
The MEES Regulations use the term “non-domestic private rented properties” (referred to here as commercial properties). They apply to commercial properties situated in England or Wales (properties in Scotland are subject to different requirements). Residential properties in England and Wales (termed “domestic private rented properties” in the MEES Regulations) are subject to similar provisions, but these are outside the scope of this article.
The MEES Regulations do not apply to leases of six months or less (unless the tenant has already been in occupation for a continuous period of more than 12 months) or very long leases (a term of 99 years or more).
The MEES Regulations only apply to commercial properties that require an EPC and actually have an EPC. Some types of property are specifically excluded from the requirement to obtain an EPC on a letting. Examples include religious properties, temporary properties and properties that do not use energy to condition the indoor climate.
How do MEES apply if a property was let before an EPC was required?
Come 2023, there will be commercial properties that are subject to leases granted before the EPC regime was introduced in 2008. These properties will continue to sit outside the scope of MEES until an EPC is obtained. Similarly, where an EPC has been obtained for a property more than 10 years ago, it will no longer be valid. However, under the current regulations the EPC will not need to be renewed, and so again the property will fall outside MEES until a new EPC is obtained. The person who obtains the EPC in either case does not need to be the landlord. In many cases the tenant may wish to obtain an EPC.
What are the available exemptions?
A number of exemptions are available, but do not offer a complete escape from MEES. Most exemptions last for only five years, although they can be claimed more than once. Each exemption, with supporting documentary evidence, must be registered on the PRS exemptions register. The register is open for public inspection. Exemptions do not pass automatically on the purchase of a property. Those buying let properties, particularly post-April 2023, will need to check the existence and basis of any such exemptions. The three exemptions that will be met most frequently are:
- The all improvements made exemption may be available where all “relevant” energy efficiency improvement works have been made (or there are none that can be made) and the property remains sub-standard. Works will only be “relevant” in so far as they satisfy the payback test, in that they will pay for themselves within seven years (sometimes referred to as the seven-year payback exemption). This exemption will end on the expiry of five years from the date of registration or (if earlier) when the landlord sells its interest in the property.
- The consent exemption may be available where a landlord is unable to increase the EPC rating to the appropriate minimum level because it has not been able to obtain its tenant’s consent or a third-party consent (such as superior landlord or planning authority) to undertake the required works. This exemption will end on the expiry of five years from the date of registration or (if earlier) when the landlord sells its interest in the property or (where based on the tenant’s refusal to consent to works) the end or earlier assignment of the lease.
- The new landlord exemption applies to a party that has become a landlord other than by granting a lease in the open market and lasts only six months. Perhaps the most significant occasion on which this will be relevant (which will become particularly relevant after April 2023) is on the purchase of a sub-standard property that is already let. Effectively, this will give the new landlord a period of six months before it is required to comply with MEES, during which it can improve the energy efficiency of the property or, as appropriate, claim one of the five-year exemptions. A similar temporary exemption applies where a new lease is granted pursuant to Part 2 of the Landlord and Tenant Act 1954 (ie a 1954 Act statutory renewal).
Are listed buildings outside the scope of MEES?
There are several inconsistencies between the EPC regime and the MEES regime, and as a result the treatment of listed buildings under MEES is unclear. There is no exemption for listed buildings, but the EPC regulations state that listed buildings are exempt from the need to obtain an EPC “in so far as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance”. However, this presents a problem, in that this cannot practically be determined without actually obtaining an EPC, at which point the property will fall within the MEES Regulations.
The cautious, but increasingly persuasive, approach to this problem is to obtain an EPC, notwithstanding the listing, and register an appropriate MEES exemption where appropriate.
Are lease renewals outside the scope of MEES?
Lease renewals are another area of uncertainty. If a potentially sub-standard property does not have an EPC on a lease renewal, the landlord may wish to argue that a renewal does not trigger the need to obtain an EPC, and therefore MEES do not apply. This approach appears to be endorsed in the government’s non-statutory guidance relating to EPCs, but the government’s MEES guidance suggests that an EPC is required to re-let the property to the tenant. Again, the safest approach is to obtain an EPC, although this will bring the property within the scope of MEES.
What are the penalties for breach of the MEES Regulations?
The penalty for breach of the MEES Regulations can be as high as £150,000 in certain circumstances, although it is thought that no penalty (of any amount) has yet been levied.
A lease of a sub-standard property that is granted in breach of the 2018 requirements, or is continued under the 2023 requirements, will remain valid even though the landlord could face enforcement action.
Do MEES apply on the sale of a property?
MEES do not apply on the sale of a property. An EPC will be required as part of the sales process, but there is no requirement to improve the energy efficiency of a sub-standard property before a sale.
However, MEES will be relevant where a sub-standard property is being purchased, in that the inability to grant new leases and the existence of existing tenancies may have an impact on the value of the property, and the incoming landlord will need to consider the energy efficiency works that may be required, review any existing exemptions and possibly gather together the necessary information to register its own exemptions.
Are further regulations anticipated?
The government has proposed further changes, which are subject to current consultation. It looks likely that by April 2030 all commercial properties will be required to have an EPC rating of B or above before being let, subject to qualifying exemptions. It is also possible that an interim standard of an EPC rating of C or above will be imposed from April 2027.
Kate Symons is a senior associate and professional support lawyer at Boodle Hatfield LLP
