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MEES Regulations from 1 April 2023: the next chapter for commercial landlords

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Since 1 April 2018, the Minimum Energy Efficiency Standards (MEES) have required commercial landlords to ensure that their commercial properties in England and Wales have a minimum Energy Performance Certificate (EPC) rating of E before granting a new tenancy to new or existing tenants, unless a valid exemption applies.

An EPC rating of F or G is, since that date, sub-standard for MEES purposes. In a significant extension of these rules, from 1 April 2023 it will be unlawful for a landlord to continue to let a commercial property with a sub-standard rating, unless a valid exemption applies.

How will this change affect landlords?

Landlords granting new leases after 1 April 2018 will already have been caught by the requirement not to let sub-standard property and will presumably have taken all steps to comply with the Regulations before granting the lease. However, after 1 April 2023, MEES will, with limited exceptions, automatically apply to catch all subsisting leases, even where there has been no tenancy renewal, extension or new lease granted. Landlords may not be aware of this if the relevant leases have been in place since before 1 April 2018.

Leases which are excluded include those for a term of 99 years or more, and those granted for a term not exceeding 6 months (unless the lease contains an option to renew it beyond 6 months or, at the time it is granted, the tenant has been in occupation for a continuous period of more than 12 months).

What does MEES require landlords to do?

Where a landlord wishes to continue letting property which is currently sub-standard, it will need to make energy efficiency improvements which raise the EPC rating to a minimum of E. In limited circumstances landlords may be able to claim an exemption from the prohibition on letting sub-standard property.

Where an enforcement authority is satisfied that a property has been let in breach of the MEES Regulations it may impose significant financial penalties. The penalty is based on the rateable value of the property and can be as high as £150,000 per breach. The authority may also publish details of the breach, risking reputational damage for the landlord.

The breach of statute may well be a breach of headlease covenants if the landlord’s property is leasehold. Such a breach may also be an event of default under finance documents where the property is charged.

What are the exemptions?

Landlords can let (or, after 1 April, continue to let) a sub-standard property if an exemption applies and has been registered on the PRS Exemptions Register (Register). The exemptions available include those listed below. Broadly speaking, “relevant improvements” are those which will achieve an energy efficiency payback within seven years but exactly what is required in a particular case will require specialist advice:

  • A temporary exemption available on acquiring a substandard property which is already let: a new landlord has six months to carry out all relevant improvements. If the property is still sub-standard once all relevant improvements have been carried out, it must register another exemption.

The following exemptions last five years, after which they automatically expire:

  • Where all relevant energy efficiency improvements have been made (or there are none that can be made) and the EPC rating remains below E.
  • Where the landlord has not been able to raise the rating to at least E because consent to the works is, by law, required from the tenant and/or another third party (for example a mortgagee or the local planning authority) and the landlord has been unable to obtain that consent.
  • Where the landlord has not made the relevant improvements because it has obtained a report by an independent surveyor that making the relevant improvements would result in a reduction of 5% or more in the market value of the property.

Note that any exemption must be registered on the Register for the landlord to be able to rely on it.

Exemptions cannot be transferred to a new owner of the property: if a let property is sold or transferred with an exemption registered, the exemption will cease to be effective and the new owner will need to either improve the property to the minimum standard at that point, or register an exemption where one applies, if they intend to continue to let the property.

How will this change affect tenants?

The validity of subsisting leases is not affected by these changes. A landlord may not refuse consent to a tenant’s request for a new lease if the tenant has 1954 Act protection on the basis that the property is sub-standard.

However, a tenant might be affected by the new requirements in practical ways. For example:

  • The tenant’s landlord may wish to enter onto the premises to carry out works to increase their energy efficiency. The tenant will need to consider whether it wishes to allow such work to be carried out and to what extent it is required by the terms of its lease to allow the landlord access to do so.
  • Although the legislation is clear that the obligation to comply with it rests with the landlord, a landlord might try to recover some of the costs of the improvements from the tenant via the service charge, or the tenant’s reinstatement obligations or statutory compliance covenants. Both parties may need to take expert advice in such cases on the interpretation of the lease terms.
  • Tenants need to be aware that they are a landlord for the purposes of MEES in relation to any sublettings which they have effected. Tenants will need to check the terms of their lease and the sublease and take legal advice about how to manage their rights and responsibilities in this situation.

What should landlords do now?

The 1 April deadline is fast approaching. If they have not already done so, landlords should urgently review those of their properties which are let to check if any of them are affected by these changes. Where the EPC rating is lower than E, the landlord needs to carry out any relevant energy efficiency improvements and/or register a valid exemption on the Register before 1 April 2023 in order to avoid committing an offence under MEES.

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