From 1 April 2023 changes will come into effect which will alter the application of the MEES Regulations to commercial leases with potentially far-reaching consequences for landlords and tenants alike.
The current rules
Under the current MEES Regulations (in force since 1 April 2018) a landlord is prohibited from commencing any let of commercial premises which has a substandard energy efficiency rating. A substandard energy efficiency rating is currently classed as an ‘F’ or a ‘G’ rating, being the two lowest energy efficiency ratings possible, as shown on the Energy Performance Certificate (EPC) for the premises in question.
It should be borne in mind, however, that it is likely that energy efficiency standards will be tightened in the future so that these substandard ratings are amended to include ‘E’ rated premises or even higher.
The new rules
Landlords of commercial premises in England and Wales who are continuing to let premises on or after 1 April 2023 will, unless certain exemptions apply, be in breach of the MEES Regulations if:
- the premises are required to have an EPC; and
- that EPC rating is an F or a G.
The new rules mean that even though a letting of commercial premises may have commenced prior to 1 April 2023, it will still be caught by the new rules unless the premises in question are excluded or exempt in some way.
Premises that are excluded from the new rules
Some premises are not required to have an EPC, such as:
- some agricultural buildings (where no energy is consumed to condition the indoor climate);
- certain listed buildings; and
- short term lets for less than 6 months.
If an EPC is not required, the MEES Regulations will not apply.
Exemptions to the new rules
A landlord letting premises which requires an EPC but which has a substandard energy rating will be in breach of the MEES Regulations unless one of the following exemptions apply:
- Relevant improvements: if all ‘relevant’ energy efficiency improvements have been made or no ‘relevant’ improvements can be made and the premises are still sub-standard. ‘Relevant’ improvements are wide ranging and can include such things as double glazing and improved insulation.
- 7-Year payback: if the expected savings in energy efficiency over the proceeding 7 years do not outweigh the cost of the improvements.
- Wall insulation: if the landlord has obtained a certificate from an expert that the cavity wall or other wall insulation recommended would negatively impact the structure of the premises.
- Market value: if an independent assessor determines that the market value of the premises would be reduced by more than 5% by the improvements recommended.
If any of the above exemptions apply, the landlord must enter the relevant details on the Private Rented Sector (PRS) Exemptions Register so as to avoid enforcement action. Once registered, an exemption generally lasts for 5 years after which, the landlord would need to reassess the premises and consider whether, at that point, any improvements can now be made.
The effect of the new rules on landlords
A landlord is not under a positive obligation to make the energy efficiency improvements, nor will failing to do so render the lease of the premises invalid or unenforceable. However, a landlord could be subject to both financial and reputational penalties if action is taken in respect of the breach.
Financial penalties for a breach of MEES Regulations depend on the nature of the premises, duration of the breach and the rateable value of the premises. Fines can be levied up to £150,000.
A breach of MEES Regulations can also be published and so landlords might also be concerned with the effect this will have on their reputation and in particular, the ability to find prospective tenants in the future. Substandard ratings may also affect rent reviews and so landlords may additionally be concerned about a reduction in the value of the rent achievable upon review and any potential reduction in the capital value of the premises.
What should landlords do now?
Landlords should check whether any premises they own require EPCs and if so, ensure a suitable energy assessment is carried out on each property concerned. If any premises have a substandard rating, landlords need to consider what improvements they may be able to carry out to boost this rating. They should also check if, under their leases, they are able to recover the cost of these improvements from their tenants. Landlords should also check if any of the exemptions apply and if so, register the premises on the PRS Exemptions Register, as well as diarise the fifth anniversary of this date so as to prompt reassessment at the appropriate time.
The effect of the new rules on tenants
Tenants may think that the MEES Regulations are purely a problem for landlords but this is not so. Tenants should ask their landlords to see the EPC for the premises in order to check the energy efficiency rating. Tenants should generally avoid taking a lease of any substandard premises. Firstly, this could impact the tenant if they ever wished to sublet the premises in the future (which they would be precluded from doing under the MEES Regulations). Secondly, tenants should check the terms of their leases carefully and in particular, whether their landlord has the power to require them to contribute towards any improvement works under any service charge provisions or any other terms of the lease.
Whether you are a landlord or a tenant, you should take heed of the MEES Regulations and take appropriate advice as soon as possible. We can help and guide you through this process; please feel free to contact our Commercial Property team.