237: Top tips for Minimum Energy Efficiency Standards in commercial property

In a few months, the next phase of the Minimum Energy Efficiency Standard (MEES) regulations will be in force. From 1 April 2023, it will be unlawful for a landlord to continue to let out commercial property under an existing lease with an energy performance certificate (EPC) rating of ‘F’ or ‘G’ unless an exemption applies.

By way of reminder, it is already unlawful for a landlord to grant or put in place a new lease of a commercial property with an EPC rating of F or G, unless an exemption applies. Properties that are excluded from MEES include those that are not legally required to have an EPC eg religious buildings, temporary properties, properties that are to be demolished, some listed buildings etc.

Landlords in breach of MEES are subject to a financial penalty based on the rateable value of the property, with an eventual cap of £150,000 per breach.

A lease will still be valid and enforceable after 1 April 2023, despite being in breach of MEES, but landlords run the risk of enforcement action and details of the breach being made public.

Exemptions

The following current exemptions will continue to apply after 1 April 2023. Before seeking to rely on them, landlords need to register one of the following exemptions on the PRS Exemption Register.

• the ‘consent’ exemption applies where the tenant has refused consent to the proposed relevant energy efficiency improvement. This exemption can only be relied upon if the landlord needs consent from the tenant to carry out the works. In order for landlords to rely on this exemption, make sure that the landlord has reserved rights in the lease to carry out works required by MEES but subject to the tenant giving consent;
• the ‘payback’ exemption where the cost of the energy improvement works is not recouped by energy savings over a 7-year period;
• the ‘devaluation’ exemption applies where the landlord has a report from an independent surveyor which confirms that the energy improvements would devalue the property by more than 5% of market value;
• the ‘temporary’ exemption applies where a new landlord is given 6 months to assess the necessary improvements or to register another exemption; and
• it is also a legitimate reason to continue to let an F or G property where all relevant energy improvements have been made and the property remains sub-standard.

The future

In a 2020 White Paper, the Government proposed raising the minimum EPC standards for commercial properties to ‘C’ by April 2027 and then to ‘B’ by April 2030. Legislation has not yet been brought into effect, but we expect this to be implemented in due course.

The Estates Gazette reports that in the next eight years, 88% of commercial properties in the UK will need energy improvements to meet the Government’s proposed criteria. The key advice in 2023 for landlords and tenants is to:

1. double check EPC ratings now for leased properties;
2. initiate discussions now about works that need doing to improve EPC ratings;
3. check existing leases for access rights to carry out improvements and where costs lie; and
4. register any exemptions sooner rather than later.

You can read all of our backdated articles on the Real Estate page.