MEES update

The Minimum Energy Efficiency Standard (MEES) is about to be extended to existing commercial leases.

Continuing to rent out

From 1 April 2023, it will become unlawful to continue to rent out substandard non-domestic premises. Premises are currently considered ‘substandard’ if they have an Energy Performance Certificate (EPC) rating lower than ‘E’, with financial penalties reaching up to £150,000.  

Since 2018, it has been unlawful for landlords to grant a new lease (including a renewal lease) of substandard domestic or non-domestic premises. And since 2020 it has been unlawful to continue to rent out substandard domestic premises.

The impending change represents the final piece of the initial MEES jigsaw, widening the net to capture existing leases of commercial premises, including those that were granted before 2018.

Example

Imagine that commercial premises with an EPC rating of ‘F’ were let for 10 years in 2015. That letting was perfectly lawful, since the lease pre-dated the prohibition on letting substandard premises. And nothing has happened since 2018 to trigger the MEES regime.

But on 1 April it will become unlawful for the landlord to continue to rent out those premises.

So, what does the landlord need to do? They obviously can’t just stop letting the premises. The lease is a contract - and a legal estate in land - that won’t expire until 2025. The landlord will need to take action to comply with the newly-extended MEES regime.

‘E’ at all costs?

Importantly, landlords are not necessarily required to do whatever it takes to achieve an ‘E’ rating. The various available exemptions should always be considered.

Landlords may continue to rent out substandard commercial premises if the works required to improve the premises are not cost-effective, or if the premises remain substandard once all cost-effective works have been done. Certain kinds of wall insulation may also be excluded.

Cost-effectiveness for these purposes depends on whether the works will pay for themselves out of projected savings in energy bills over a seven-year period.

Similarly, landlords can continue to rent out substandard commercial premises if the required works would devalue the property by more than 5%, or if the works require a consent that cannot be obtained despite using reasonable efforts; this could potentially excuse a landlord whose tenant is lawfully refusing entry to carry out the works.

However, it is not enough for the landlord to satisfy themselves that an exemption applies. The exemption must be registered on the central exemptions register, accompanied with the evidence required for that particular exemption type.

Ultimately, from 1 April 2023 every rented commercial property with an EPC should either be rated ‘E’ or above, or have an exemption registered.

Next steps - ‘B’ by 2030

The extension of the regime to existing commercial leases is by no means the final word on MEES. It is simply the end of the beginning.

Setting the bar at ‘E’ was only ever an introductory offer. A scheme that only impacted the worst-performing 10-15% of rented commercial property could never achieve the required outcomes in terms of driving up the energy efficiency of our existing building stock.

Having previously announced that the MEES trajectory for non-domestic premises will see the minimum standard increase to ‘B’ by 2030, the government consulted in 2021 on what that would look like in practice.

The proposal is to increase the minimum standard for non-domestic properties to ‘C’ on 1 April 2027, and then to ‘B’ on 1 April 2030. MEES would then affect 85% of rented commercial premises, requiring a million buildings to be improved by the end of the decade.

Each increase will be preceded by a two year ‘compliance window’. From the start of the first compliance window on 1 April 2025, it will be compulsory for all rented commercial property to have a valid EPC in place. This will prevent properties slipping through the MEES net because the EPC provided on letting has subsequently expired, or because the premises are currently exempt from EPC requirements.

Although we still await final confirmation of the roadmap, landlords cannot afford to wait and should proceed on the assumption that the consultation proposals will be implemented.

For further information please get in touch.