Commercial landlords face changes to Minimum Energy Efficiency Standards

Significant changes to the Minimum Energy Efficiency Standards (MEES) could impact the portfolios of commercial landlords from April 2023.

Current requirements

MEES were first introduced by the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. The MEES Regulations use the term “non-domestic private rented (PR) property” to cover most, but not all commercial premises.

Under the Regulations, it has been unlawful (subject to limited exceptions) since 1 April 2018 for commercial landlords to grant or renew leases with an Energy Performance Certificate (EPC) below an E rating.

Developments from April 2023

Government updates to MEES from April 2023 will make it an offence (subject to limited exceptions) to continue to let or sub-let commercial property with an EPC rating below E. The lease itself will not be affected and will remain valid.

These changes form part of the government’s Net Zero Strategy which has the aim of meeting carbon reduction targets. Further proposals aim to bring in a minimum EPC C rating for commercial properties by 2027 before an ultimate target of minimum EPC B ratings by 2030.

Enforcement and penalties

Landlords found to be breaching the MEES Regulations face significant civil penalties. Local authorities can appoint local Trading Standards officers to enforce MEES in relation to properties in their area.

A breach of MEES lasting less than three months could result in a fine equivalent to the greater of either £5000 or 10% of the rateable value of the property at the date of service of the penalty notice, up to a maximum of £50,000.

A breach of MEES lasting three months or more could result in a fine equivalent to the greater of either £10,000 or 20% of the rateable value of the property at the date of service of the penalty notice, up to a maximum of £150,000.

Furthermore, landlords could face the entry of the details of the breach on the public part of the PRS Exemptions Register. This carries the risk of adverse publicity for the landlord. If a landlord submits false or misleading information on the Register and fails to comply with a compliance notice then they could receive a fine of £5000.

It should be noted that MEES regulations do not apply to properties let for less than 6 months or more than 99 years.

Exemptions from MEES Regulations

Landlords should be aware of the exemptions noted below contained in the MEES Regulations, to potentially avoid the possibility of receiving enforcement penalties. Any exemptions that do apply must be registered on the PRS Exemptions Register and will last for 5 years.

• Consent exemption: this applies when the landlord has been unable to increase the EPC rating to E within the preceding 5 years to an enforcement action because they have been refused consent by a tenant or third party despite reasonable efforts to obtain it.
• Devaluation exemption: this applies when a landlord has been unable to increase the EPC rating due to receiving a surveyor’s report in the preceding 5 years to an enforcement action, which states that any necessary improvements would result in a reduction of more than 5% in the property’s market value.
• All improvements made exemption: this exemption applies to the situation where a landlord has made all the relevant energy efficiency improvements that can be made, and the property is still below the minimum rating or there are no relevant improvements to be made.

Summary

The proposed changes to MEES from April 2023 put commercial landlords at risk of penalties for non-compliance. The financial threat of fines should encourage landlords to upgrade buildings to meet the minimum energy efficiency standards required.

Equally, landlords could face devaluation of properties in their portfolios when they come to sell if potential purchasers have to factor in improvement costs. Tenants may also ask to pay less on rent reviews if a property’s energy efficiency is substandard.

However, many leases are unclear as to who should pay for any necessary upgrades. It seems likely that these costs could fall to commercial landlords with the result that some may find themselves unable to grant leases of premises or continue to let premises. Negotiation with tenants to complete energy efficiency improvements may be necessary to avoid this situation.

It would therefore seem sensible for landlords to now review their portfolios to identify commercial properties subject to MEES and any marginal properties with an EPC rating of D or E. Landlords taking a long-term approach to improving their properties energy efficiency above the minimum EPC E rating are likely to make their properties more attractive to prospective tenants and purchasers.

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