MEES – Will your building be unlettable?
by Kate Harrison
Landlords need to be aware of the Minimum Energy Efficient Standards (MEES) imposed on lettings of commercial premises from 1 April 2018 under the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015.
The assessment of the energy efficiency of a building using the A (best) to G (worst) rating system has been a legal requirement since 2007 with an Energy Performance Certificate (EPC) confirming the efficiency rating to be provided to a prospective tenant. Whilst there are buildings which are exempt; those with a low energy demand such as agricultural buildings and workshops or free-standing buildings with a floor area less than 50 m2 for example, the majority of commercial premises have required an EPC on a letting to a new tenant.
The MEES provisions will mean that, subject to certain requirements and exemptions:
• from 1 April 2018, landlords of non-domestic private rented properties may not grant a tenancy to new or existing tenants if their property has a rating of band F or G.
• from 1 April 2023, landlords must not continue letting a non-domestic property which is already let if that property has a rating of band F or G.
The majority of commercial leases will be covered by the new regulations. There are two types of tenancy which will not be required to meet these new standards being:
(i) a tenancy granted for a term not exceeding 6 months (unless the tenancy agreement contains an option to renew or extend the term or, at the time the tenancy was granted, the tenant had been in occupation for a continuous period of more than 12 months); or
(ii) a tenancy granted for a term of 99 years or more.
If a commercial lease does not fall within these exceptions a landlord may apply to register for one of the prescribed exemptions before entering into the new letting:
• if the cost would be unreasonable assuming a seven year period to recoup those costs through improved energy efficiency.
• the requisite consent of a third party cannot be obtained despite using reasonable endeavours to obtain it.
• the improvements have been carried out but the minimum E rating has still not been achieved.
• the improvements works required would result in a reduction of the value of the property of more than 5%.
• the landlord has become a landlord “under duress”, due to a contractual obligation or as a result of being a guarantor under a lease where there has been default on the part of the tenant.
The exemption will be valid for a period of five years when a new application will have to be made, unless the exemption claimed is that of the “involuntary” landlord, which will be valid for only six months.
Even with a D rating a landlord cannot be complacent. EPCs are valid for up to ten years and a prospective or existing tenant might arrange its own assessment if the EPC had been commissioned several years ago. This could produce a lower rating than E as building regulations will have been revised during the intervening period to impose higher energy efficiency standards. The tenant’s EPC would supersede the earlier EPC. This could be a very useful bargaining chip in negotiations as the landlord is suddenly faced with additional costs it cannot pass on or at least not without making substantial concessions.
With the prospect of a prohibition on existing non-compliant lettings in 2023, landlords should be evaluating their portfolios now and consider renewing EPCs, particularly if they are more than five years old and they have a D or E rating, since the efficiency standards are likely to be made more stringent in future. Existing leases should be reviewed to establish whether there are rights of access to carry out the necessary works and who will bear responsibility for these costs. Attention should be paid to the drafting of service charge provisions and repairing covenants in new leases to avoid a future breach of the regulations without the power to remedy it.
Lenders should also consider whether they can impose an obligation on existing borrowers to review the energy efficiency of the security properties under the terms of the facility agreement. This is not without risk however if the rating means work will be necessary, the cost of which cannot be passed on to the tenant and the landlord is unable to finance this without recourse to additional finance. For new facilities lenders should ensure that valuations consider the risk of upgrading works being required. It may also be appropriate for fresh EPCs to be commissioned as a condition precedent to a remortgage or loan extension.