Prior to the first lockdown the Minimum Energy Efficiency Standards (“MEES”) were a key priority for many property owners and occupiers. Understandably they were pushed down the agenda as more pressing issues emerged but neither the rules nor the timescales have changed over the past 18 months. Indeed, the rules will soon be stricter.
This note (a) summarises the current position, (b) looks at the proposals to strengthen the rules relating to MEES and (c) assesses the impact that this will have on property owners and occupiers.
This note only relates to non-domestic properties. Different rules apply to domestic properties. All references to properties contained herein refer to non-domestic properties.
Subject to limited exemptions, landlords cannot grant a tenancy to either new or existing tenants of properties that have an EPC rating of F or G.
From 1 April 2023, subject to limited exemptions, landlords must not continue to let properties that have an EPC rating of F or G.
From 1 April 2027 It is likely that, subject to limited exemptions, properties will need to have an EPC rating of C before being let. This will increase to a B rating by 1 April 2030.
In addition, a landlord of a rented property will need to have an EPC at all times. At the moment a property is only within the scope of the MEES Regulations if there is a valid EPC in place. This has presented a potential loophole for properties that do not currently have a valid EPC (e.g. because an existing EPC is more than 10 years old or at renewal where an EPC was not required on the original letting). This loophole will be closed.
IMPACT ON OWNERS
Between January and March 2020 only 14% of EPC’s lodged achieved an A+/A or B rating. Building owners are therefore going to have to incur significant capital expenditure on improving the energy efficiency of their building to ensure compliance with the anticipated change to the MEES Regulations. The pandemic may have diverted attention elsewhere over the last 18 months but for landlords with large property portfolios the 1 April 2027 deadline will approach quickly. Works required to building services will need to be identified, budgeted, programmed and completed in the coming years.
There are no proposals to change the current maximum fine of up to £150,000 for owners that breach the MEES Regulations. There may be additional fines for breaches relating to the registration process.
Property owners will need to ensure that any new leases that are granted contain sufficient reserved rights to enable landlords to comply with their obligations under the MEES Regulations. Service charge provisions should be checked to see if the cost of works can be passed on to occupiers, particularly where occupiers will benefit from cost savings as a result of a more energy efficient property.
Property owners are also likely to require more control over alterations carried out by occupiers – they will not want an occupier’s fit out to lower the EPC rating. We are already seeing:
- More detailed scrutiny of fit out/re-fit proposals
- A requirement to provide modelling showing the likely impact of proposed works on the energy rating of the property
- Greater control over the production of EPCs
- Provisions requiring occupiers not to reinstate alterations that improve the energy efficiency rating of properties
To meet MEES requirements, landlords are sometimes required to install equipment in new or refurbished properties that will quickly be replaced by an incoming tenant’s fit out.
This is clearly inefficient so the Government intends to introduce a temporary “shell and core” exemption to delay the enforcement date for MEES to a point 6 months after the occupier has started its fit out.
IMPACT ON OCCUPIERS
MEES primarily affect property owners – a breach of the MEES Regulations does not affect the validity of the lease. However, MEES also impact occupiers. For example:
- The MEES Regulations apply to sub-lettings. An occupier will not be able to sub-let unless it can improve the EPC rating or claim an exemption.
- Lease drafting is evolving to deal with MEES. Occupiers will need to review leases carefully to ensure that increased costs are dealt with fairly – an occupier will want to ensure that it is not liable for an owner’s costs incurred in improving the EPC rating of a property so that it is lettable but there arguably should be an appropriate contribution where works to the property will lead to savings in running costs.
- The interests of owners and occupiers are often aligned. Most companies will have their own ESG strategies and environmental reporting requirements are going to increase as we move towards net zero. Green lease provisions should not only be seen as a benefit to owners. Well balanced drafting can also help occupiers to meet their own environmental targets.
- As noted above landlords are likely to scrutinise fit out approvals in more detail. Occupiers need to be prepared for this by ensuring that they have analysed the impact that the proposed works may have on the environmental performance of the property. This will help to avoid delays in the approval process.
MEES are a key part of the Government’s drive towards net zero. The MEES Regulations will become more stringent. Until now they have only affected a limited number of properties but the likely changes will affect the vast majority of existing properties. Action is needed sooner rather than later – we are unlikely to see a delay to the proposed legislative programme as a result of recent lockdowns.