MEES Regulations for commercial lettings
The original Minimum Energy Efficiency Standards (MEES) Regulations came into force on 1 April 2016.
For commercial properties, these brought in a prohibition against landlords entering into new letting arrangements from 1 April 2018 involving properties with an EPC rating of less than E.
From 1 April 2023, this will apply not only to new lettings, but also pre-existing lettings, unless an exemption applies to the premises.
MEES Regulations Proposals
The Government’s 2020 Energy White Paper – “Powering our net zero future” – has further proposed that landlords should be required to show that all let commercial buildings have an EPC rating of C or above by 1 April 2027, and an EPC rating of B or above by 1 April 2030.
In March 2021, the Department for Business, Energy & Industrial Strategy published its proposals for the implementation, enforcement and practical delivery of this policy. The proposals make compliance and enforcement much more transparent and stringent.
These proposals would introduce a new national PRS Compliance and Exemptions database, which requires landlords to register a valid EPC certificate for every commercial property, or register the exemption on which they are seeking to rely. This will enable tenants and investors to access this public database to ensure that any property they are considering is compliant with the MEES Regulations.
It is clear that MEES compliance is predominantly intended to be a landlord obligation and cost.
However, we are seeing tenants taking on leases which extend beyond the 2027 and 2030 deadlines, and there is some concern as to whether these costs could somehow be passed on to them. There is at present no industry accepted drafting in commercial leases to deal with the relationship between landlord and tenant and MEES. However, tenants should consider the following:
Due diligence: pay proper attention to the EPC rating as part of your due diligence and understand what this means for your letting. For example, are energy efficiency works going to be likely over the next few years? If so, what are these likely to look like, and what level of disruption could this cause?
Heads of terms: consider the impact of the EPC rating on the annual rent and other key terms.
For example, a low EPC rating could lower the rent, whilst you would also want to understand how and when energy improvements to the property are to be carried out and paid for.
Tenant’s works: there is an expectation that tenants will not be immune from compliance. It is likely that tenants will have to consider energy efficiency improvements when investing in fit out works, as well as adhere to duties of cooperation with the landlord.
Lease terms: check that the lease does not seek to pass on obligations to comply with MEES
(other than in relation to tenant fit out works) or the cost of doing so under the terms of the lease
(including through the service charge).
Underletting: beware of becoming a landlord as a result of underletting the property, as you could be required to comply with the regulations as landlord in relation to the underlet premises.
As mentioned above, there is no industry accepted approach to governing the relationship between landlord and tenant in relation to these proposed new regulations. Upcoming government guidance should shed more light on this however. In the meantime, it would be wise to consider the impact that these regulations may have when carrying out due diligence, and negotiating and entering new leases.
How we can assist
We are here to assist and advise you on your proposed property-related arrangements. In particular, we can:
Help ensure that you know and understand the impact of the EPC rating for your premises. before entering into your lease;
Help you to address any concerns during heads of terms and lease negotiations; and
Advise on other potential impacts that could arise in connection with a property’s EPC rating.
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide an introduction to the Proposed Minimum Energy Efficiency Standards Regulations. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.