Commercial property: changes to the Minimum Energy Efficiency Standards (MEES) Regulations 2023

COMMERCIAL PROPERTY: CHANGES TO THE MINIMUM ENERGY EFFICIENCY STANDARDS (MEES) REGULATIONS 2023

Under the current MEES regulations, it is unlawful (save for some limited exceptions) for commercial landlords to grant or renew leases with an Energy Performance Certificate (EPC) below an E rating.

As part of the Government’s Net Zero Strategy, these rules will become stricter. From 1^st April 2023, commercial landlords will no longer be permitted to let a commercial property with an EPC rating of F or lower, even if the lease is mid-term. It is estimated that approximately 20% of non-domestic properties fall within the F and G brackets.

The MEES regulations extension will cover all leases, including where a lease is already in place and apply to sub-lettings and assignments. The regulations will not apply to lettings of 6 months or less.

Exemptions

Landlords will be exempt from having to comply with the regulations if they can demonstrate one of the following:

• The Golden Rule – where all cost-effective energy efficiency improvements have been carried out, these improvements will pay for themselves in energy savings within seven years, but it still doesn’t meet standards.
• Third Party Consent – consent to undertake works is refused by a third party e.g. a Local Authority.
• Devaluation – a qualified expert provides written advice that the improvements would devalue the property by 5% or more, or that the works would damage the property.

Exemptions last for five years and need to be lodged on the Government’s PRS Exemptions Register.

Implications

Landlords are likely to be the most affected parties as the commitment and restrictions in the MEES Regulations fall on them. Landlords are likely to suffer from the following implications:

• Making some properties illegal to let unless they are upgraded to meet the minimum standards.
• Valuations of such properties could be affected if their marketability is diminished.
• Potential inability to refinance properties.
• Rent reviews for such properties could be adversely affected.
• Dilapidations assessments could also be adversely affected.

Penalties

The MEES Regulations will be enforced by Local Weights and Measures Authorities, which will have powers to impose civil penalties that are set according to each property’s rateable value.

The penalty for non-compliance is based on the property’s rateable value and is up to a maximum fine of £150,000 per occasion.

Actions to take

Landlords should review their portfolios immediately to identify any commercial properties that are subject to the MEES Regulations, to include the following checks:

• Check the current EPC rating of the property.
• Identify any properties let with an EPC rating of F or G that will continue after 1^st April 2023.
• Consider any properties with an EPC rating of D or E and what improvements can be made.
• Negotiate with tenants regarding the completion of energy efficiency improvements.
• Where possible, carry out energy efficiency improvements so that the property is no longer sub-standard.
• Consider if any exemptions apply and if they do, register this on the PRS Exemptions Register. It is important to remember that such exemptions will only last 5 years and the landlord should revisit the exemption to check whether it still applies. If an exemption still applies, it will need to be re-registered.

Beyond 2023

The UK government is proposing that commercial properties have an EPC B rating by 2030 on the basis that landlords and tenants will be barred from leasing accommodation that has a rating below B.

It is possible that the proposed new EPC regulations might be phased in with the possibility that, with effect from 2027, the EPC level might be raised to C on the basis that it will not be possible to lease properties with a rating below C.

As part of the Government’s proposals it will be a requirement to maintain the building on the basis that the EPC rating does not fall below the Government’s prevailing EPC threshold.

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