Minimum Energy Efficiency Standard to impact commercial properties from April 2018

From April 2018, all rented commercial buildings will be required to hold a minimum legal standard for energy efficiency

The Minimum Energy Efficiency Standard (MEES) was introduced in March 2015 under the Energy Efficiency (Private Rented Property – England and Wales) Regulations 2015. Originating from the Energy Act 2011, the MEES regulations provide a new legal standard (for those properties which require an EPC) that provides opportunities and risks for landlords, occupiers who wish to sublet or assign space, developers, lenders and freehold investors.

What is the Minimum Energy Efficiency Standard?

Currently all commercial buildings have an energy efficiency rating that goes from A – G under the existing EPC framework. F & G are considered the worst performing buildings. The MEES legislation which comes into force in April 2018 means that public and private sector non-domestic landlords will not be able to grant a tenancy to new or existing tenants if their property has an EPC rating of band F or G. From 2023 landlords will not be able to lease buildings with an energy efficiency rating lower than E.

It is estimated that as much as 20% of UK commercial buildings would fail to meet the new standard.

However, there are exemptions in place which can be applied for where a property can demonstrate that compliance with the standards is economically unviable or where the building falls within one of the approved exemptions (see below).

Who is exempt from MEES?

Currently MEES does not apply to:

  1.  Buildings which are not required to hold an EPC, such as industrial sites, non-residential agricultural buildings with low energy demand, certain listed buildings, temporary properties and workshops.
  2. Buildings where the EPC is older than 10 years or where there is no EPC.
  3. Tenancies of less than 6 months (with no right of renewal) or tenancies of over 99 years.

Determining whether a building and tenancy are within scope requires an analysis of the Energy Performance of Buildings (England and Wales) 2012 and the MEES regulations together to assess whether a property is liable for minimum standards.

What are the implications for commercial property?

  1. Marketability of properties would become impossible where they are unable to meet the minimum standards. This may change the availability of commercial property stock and possibly increase the number of properties being sold for residential development or require immediate capex investment from the landlord.
  2. Valuations of properties unable to meet the standards or unable to exempt themselves from MEES will be affected. This may have implications for existing tenants and for rent reviews.
  3. Commercial property owners will look to bring forward rent reviews prior to April 1st 2018 in order to re-let the property prior to the introduction of the minimum standards to give them more time to comply.

Considerations for organisations leasing commercial property.

As this legislation is largely going to affect landlords it is prudent to assume that any commercial property which doesn’t meet the minimum standards for 2018 and the further standards for 2023 will look to (where exemptions cannot be gained) either re-develop or sell the premises, or invest in capital works to retrofit and improve efficiency within the building. This is likely to:

  1. Change existing lease arrangements to enforce rules around the landlords right to enter to install energy efficiency projects.
  2. Suggest that landlords will look to recover the costs from tenants or under lease renewals push the liability for minimum efficiency standards to the tenant, increasing the cost of building occupation.
  3. Create a challenge from tenants as to the EPC rating of eligible buildings, which is likely to affect rental rates (a positive condition for tenants).

Since the requirement to comply with the standards is the responsibility of the landlord (or where a tenant sublets space they are in effect a landlord) it is worth considering reviewing the current estate (either from a landlord or tenant perspective) and working together to create a viable plan for those buildings that are unlikely to meet the standards.

Non-Compliance risks & exemptions

An EPC rated building may be eligible for an exemption where:

  1. An independent assessor determines that all relevant energy efficiency improvements have been made to the property or where improvements could be made these have been deemed to not have a return on investment within seven years. This is otherwise referred to as the Golden Rule under the Green Deal.
  2. An independent assessor determines that any energy efficiency improvements may damage the fabric of the property or unduly affect the environment of the building.
  3. It is determined that the relevant energy efficiency measures that could be made to the property are likely to reduce the market value of the property by more than 5%.
  4. Consent from persons such as a tenant, a superior landlord or from the relevant planning authorities is withheld or has been given with conditions which the landlord cannot reasonably or economically comply.

Exemptions must be registered on the central Government PRS Exemptions Register and any accepted exemptions will expire after 5 years and are not transferrable where a property is sold.

The MEES regulations will be enforced by the Local Weights and Measures Authorities (LWMA’s) and they will have powers to impose civil penalties which are set by reference to the properties rateable value.

The penalty for renting out a property for upto 3 months from the implementation of the standards will be equal to 10% of the property’s rateable value, subject to a minimum of £5,000 and a maximum of £50,000. Therefore, for periods beyond 3 months the penalty rises to 20% of the rateable value, subject to a minimum of £10,000 and a maximum of £150,000.

It is important for tenants to be aware than where there is a breach of the MEES standards or where a penalty is imposed the lease remains valid and in force, and as such this may have serious consequences where suitable clauses have not been agreed to deal with a material breach of the MEES.

Beond conclusions and recommendations

The new MEES standards are a significant risk to both landlords, property owners and tenants where eligible buildings are currently rated with an EPC of F or G. However, given the current considerations from organisations to lease or rent high EPC properties (to reduce energy costs or to meet low carbon standards) it is anticipated that much of this discussion will have taken place already.

Beond can support both landlords and tenanted organisations in managing the MEES standards by:

  1. Reviewing and assessing the opportunities available for landlords for non-MEES compliant buildings and providing a full energy audit and technology service to help meet MEES standards or where appropriate provide evidence of non-compliance under the exemption scheme.
  2. Working with tenanted organisations to create a landlord strategy to minimise the risk of MEES liabilities and cost forming part of their lease renewals.

Whilst the liability to meet MEES standards sits with the landlord (or property owner), Beond believes a joined up and considered strategy with both the landlord and tenant will achieve the best result for both parties. The transition of liability and cost will be a significant consideration for lease renewals through to April 2018 and as such due consideration should be placed on the optimum strategy to achieving MEES standards by the required dates.

Beond has significant expertise in:

  1. Auditing and understanding the available options for building efficiency and energy reduction and managing the link to protect the supply contract structure.
  2. Achieving complete whole of market tendering for energy efficiency and reduction technologies as a completely technology independent consultancy.
  3. Bringing new technology to our clients by engaging with innovative and emerging solution providers to take advantage of the latest advances.