Commercial landlords beware: minimum energy efficiency standards are coming soon

As part of its carbon reduction strategy, the government is introducing minimum energy efficiency standards, known as ‘MEES’, for privately rented residential and commercial properties. From 1 April 2018, it will be illegal to grant a new lease of a property that has an energy performance rating of F or G, unless you can show an exemption exists. The MEES regulations and guidance are complex and there are different rules for domestic and commercial lettings. In this article, Yildiz Betez, commercial property expert with Thackray Williams explains the rules for commercial property.

‘Since 2008 landlords have been obliged to obtain an energy performance certificate for most properties they intend to let out. This is so that tenants understand, before they take a lease, how much the property will cost to heat and how this cost could be reduced. The ultimate decision as to whether the lease of an inefficient building should be taken has, however, always rested with the tenant’, says Yildiz. ‘Not so from 1 April, when landlords will be prohibited from letting out property with anything less than a grade E rating, unless they can show that one of a limited number of exemptions applies.’

Properties caught by the regulations

To determine whether the MEES regulations apply, you need to ask yourself the following questions:

Does the property have an energy performance certificate (EPC)?Some types of property, such as industrial sites, workshops or non-residential agricultural buildings with low energy demands, are exempt from the EPC regime.The MEES prohibition on lettings only applies where there is a requirement for an EPC.

Is the property being let on a new lease or an existing lease?The MEES regime will bite first on new lettings and lease renewals, but from April 2023 landlords of commercial property will also be obliged to comply with MEES in relation to properties let under leases which commenced before April 2018 and are still in place in 2023.

How long is the proposed letting?Short tenancies for less than six months will not be caught by MEES, unless the lease allows a renewal or extension, or if the tenant has already been in continuous occupation for more than 12 months.Long leases for 99 years or more are also outside the scope of the MEES regulations.

Is the property itself exempt?The regulations list a number of types of property not caught by MEES, including small stand-alone buildings and buildings which are to be demolished.The position in relation to listed buildings is uncertain.It seems that they are intended to be exempt, but the precise wording of the rules and guidance leaves some room for doubt.Your solicitor will be able to advise on whether an exemption applies to your property.

Do the steps needed to improve the property’s energy efficiency rating qualify for their own exemption? Only improvement works that can be wholly funded under the government’s green deal initiative, or which will pay for themselves by energy cost savings over the next seven years need to be carried out.Improvements which require third party consent, which cannot be obtained or will only be given subject to unreasonable conditions, are also not required to be undertaken.Neither are any improvements which an independent surveyor certifies as being likely to result in a reduction in the property’s market value by more than five per cent.

All exemptions must be registered. Once registration has taken place, it will be valid for the next five years.

Consequences where MEES applies

Where you have a non-exempt F or G rated property that you would like to let out, you will need to take steps to increase the property’s energy efficiency rating to at least a grade E. Failure to do this before a lease is granted will not affect the validity of the lease, but it will expose you to the possibility of a significant financial penalty.

‘Fines of between £5,000 to £150,000 may be imposed, depending on the value of the property and how long it takes for you to acknowledge your failure and take steps to address it’, explains [name of solicitor].

Failure to comply with the regulations will also be published, which means a breach of MEES could cause damage to your reputation as well.

Conclusion

The government is committed to improving the energy efficiency of all buildings and the provisions of the MEES regulations are just one element of the government’s attempt to deliver on that commitment. Further initiatives to increase the efficiency of residential and commercial properties are likely, so, whether or not you will be caught by MEES immediately, it would be prudent for you to start thinking about the energy efficiency of your buildings now to ensure that you are ready for any further measures that may be introduced.

For advice on the minimum energy efficiency standards, or any other commercial property matter, please contact Yildiz.