MEES Regime

With cost of energy rising significantly recently, energy efficiency has become a hot topic for discussion throughout all walks of life. From switching off electrical appliances on standby to reducing the frequency and time of operating your washing machine, the recommendations and suggestions are endless. Tenants of commercial leases are no different and with the ever-looming prospect of an economic recession, many business clients are concerned about the compounded effect on outgoings as a result of their business premises being not as energy efficient as it could be. Fear not, as help may be just around the corner with changes to the MEES regime. 

Under the Minimum Energy Efficiency Standards (MEES), it is currently unlawful for a commercial property landlord to grant a brand-new commercial lease or extend an existing lease (for certain properties) where the EPC rating is E or lower (energy efficiency is inversely proportionate to the rating i.e., a property with an EPC rating of A is more energy efficient than one with B) unless there are able to demonstrate that exemptions apply. We will look at what exemptions are available in detail further in this article.

These rules are being extended to most existing commercial leases from 1^st April 2023. For the academics reading this article, the details of the MEES standard are set out under The Energy Efficiency (private Rented Property) (England and Wales) Regulations 2015 which in turn originates from The Energy Act 2011.  A MEES standard originally began being implemented in April 2018 however, due to recent external factors, this area of law has started becoming more and more relevant in practice.

What are the broader expectations of the MEES Regime?

The government is working towards an expectation that all qualifying commercial properties will have an energy efficiency rating of B or above by 2030. This is in line with the Government’s expectation to be carbon neutral by 2050. Although various building control safeguards are currently in place to ensure that all brand new commercial properties are as energy efficient as they can be, there is no straightforward process to ensure or police Landlords are actively making improvements to existing, older properties. Assuming the regime is successfully applied under current proposals, estimates suggest that around a million commercial properties will be required to comply with MEES by 2030.

Does MEES apply to my property?

As we have commented briefly on our opening comments to this article, the MEES regime does not apply to all commercial properties, however establishing if it does or doesn’t is a bit complex. This is where your commercial lease solicitor will be able to help you navigate this complex landscape. It is in our view however, easier to look at subject properties which tend not to fall into MEES. These are as follows –

1. Buildings exempt from an EPC, such as warehouses, listed buildings etc
2. Commercial leases with a term less than 6 months and therefore, ones with no automatic right of renewal
3. Tenancies over 99 years

What exceptions apply to the MEES standard?

Apart from buildings and leases for which the Standard doesn’t apply for, the Landlord must demonstrate that they have a registered exemption on the PRS Exemptions Register. Exemptions apply where –

1. A determination has been made by an independent assessor concluding that all practical efficiency improvements have been made to the property.
2. A similar determination as above where improvements could lead to the property being devalued by over five percent of market value.
3. Refusal of due consent necessary from relevant governing bodies such as the local authority or tenants for the time being.

Evidence of such exemptions having been sought, must be registered on the public register. It is worth noting that any current exemptions are non-transferrable between successive landlords also that the exemption is only valid for 5 years.

You can inspect any current exemptions recorded against a property using the following link –

https://prsregister.beis.gov.uk/NdsBeisUi/register-search-exemptions

What are the risks for landlord’s for non-compliance of the regime?

Simply put, you will be liable to a financial penalty in correlation to the property’s rateable value.  The exact sum of penalty will be calculated by the Local Wights and Measures Authority, using the following guidance –

• Where the term of the Lease is for 3 months or less, the penalty will be equivalent to 10% of the rateable value where the minimum penalty will be £5,000 and the maximum being £50,000.00
• Where the term is for a period greater than 3 months, the penalty will be 20% of the rateable value with a minimum penalty of £10,000 and the maximum being £150,000.00.

The tenant will still have security of tenure if enforcement action is brought against it, meaning the landlord cannot simply terminate the lease to avoid the penalty being imposed.

Will the regime change affect reversionary interest holders and lenders?

To a degree, yes. Unless the freeholder has granted a head lease for over 99 years, they will be impacted by the MEES regulation. From a commercial perspective, the biggest issue that Freeholders face is the reduction of the asset value as result of improvement costs. It is safe to assume circumstances where potential head leaseholders would be reluctant to enter into leases knowing they would subsequently be liable under the regime before they themselves may be able to let the property.

Lender’s will equally need to adjust their standard lending criteria accordingly, when it comes to commercial properties going forwards. The primary threat we can identify is a scenario where a lender is unable to resell a property following repossession proceedings due to the asset being in contravention of the regime. A lender could mitigate associated risks by broadly, ensuring the property meets regime requirements or otherwise, factoring in improvement costs as part of their lending criteria.

How can Express Conveyancing help?

Express Conveyancing’s commercial property team have been preparing our commercial clients for a number of years in anticipation of this MEES regime change. If you are looking to either grant a lease as a landlord or take up a new lease as a commercial tenant, please visit our commercial page here and contact our team to find out how we may assist you.