From 1 April 2023 these prohibitions are widened to make it unlawful for landlords to continue to let or sub-let sub-standard commercial property.
The prohibitions continue unless either of the following apply:
- the landlord makes sufficient energy efficiency improvements to the property, so that it is no longer sub-standard
- the landlord can claim a legitimate reason not to undertake energy efficiency improvements; and this has been validly registered on the PRS Exemptions Register
Remember, that although from 1 April 2023 it will be unlawful for a landlord to let or continue to let a sub-standard property, the lease itself is not affected and will still be valid.
Implications of MEES
It is estimated by Government that approximately 18% of commercial properties are presently in the EPC ‘F’ and ‘G’ rating brackets.
This is likely to have an adverse impact on:
- the ability of the landlord to let or continue to let such properties
- valuation if marketability is diminished
- availability of debt
- rent reviews
- dilapidations assessments
What action should I take?
Owners should look at their portfolio now to identify commercial properties subject to MEES. MEES applies to most commercial properties but there are some exemptions:
- properties with a satisfactory EPC rating (E or above)
- properties that are not let on a qualifying tenancy (i.e. properties that are let for less than 6 months or more than 99 years)
- properties that are not required to have an EPC (e.g. some listed buildings)
- a property that would be required to have an EPC on a new letting but does not currently have a valid EPC (i.e. a property which was last let in 2010 and now has an EPC more than 10 years old)
- properties that are not situated in England or Wales
- properties that are dwellings (these will be subject to minimum energy efficiency regulations specific to dwellings rather than commercial property)
If a property falls into one of the exemptions then MEES may not apply.
For all other properties:
- check your EPC rating
- identify any properties let with an EPC rating of F or G that will continue to be let after 1 April 2023
- also note marginal properties let with an EPC rating of D or E (see below)
- negotiate with tenants regarding the completion of any energy efficiency improvements
- where energy efficiency improvements are to be carried out check leases to consider whether all or some of the cost can be passed to the tenant via the service charge
- where possible carry out sufficient energy efficiency improvements so that the property is no longer sub-standard (i.e a minimum rating of E)
- consider whether an exemption applies:
- where all energy efficient improvements have been made to the property but it is still sub-standard i.e. EPC rating remains an F or G
- where consent to undertake works has been refused by a third party e.g. a tenant who is not contractually obliged to permit access
- where a suitably qualified expert provides written evidence that the improvements would result in a devaluation of the property by 5% or more or that the works would damage the property
- in certain circumstances a landlord is given 6 months to comply – these are called temporary exemptions
- if an exemption does apply, register this on the PRS Exemptions Register. Remember, however, that an exemption lasts for 5 years at which point the landlord must revisit the exemption to see whether it still applies, or whether it is now possible to increase the EPC rating of the property by carrying out energy efficiency improvements. If it is still not possible, a further exemption must be registered
Beware of the risks
The penalty for non-compliance is based on the property's rateable value and carries a maximum charge of £150,000.
How can DWF help?
- help to identify properties that will be subject to MEES
- review leases of those properties, identifying those where MEES costs can be claimed from or passed to the tenant
- assist with drafting of future leases to deal with MEES issues
Currently, if a commercial property has an EPC of E or above MEES will not apply, however, the UK Energy White Paper 2020 confirms the policy intention that the future trajectory for non-domestic MEES will be EPC B by 1 April 2030. Therefore, although it may be tempting for landlords to target an EPC rating of E, the bare minimum, this may be short-sighted. Landlords that aim higher will be future-proofing their buildings from more stringent standards, making them a more attractive proposition for tenants, prospective purchasers and investors.
A recent Government consultation suggests giving local authorities access to bulk EPC data to assist local authorities in enforcing MEES. Local authorities could potentially use this, together with the information on the PRS Exemption Register, to identify properties which are let in breach of MEES.
To discuss any of the points raised in this article please contact Helen Balliger or James Froud.