The potential impacts for landlords, tenants and buyers of commercial property
The Minimum Energy Efficiency Standards (otherwise known as MEES) came into force on 1st April 2018.
The new regulations prevent landlords from granting new (or renewing existing) tenancies of non-domestic properties which fail to meet the minimum rating of an E.
An Energy Performance Certificate (EPC) must be provided whenever a property is sold, built or let to a tenant. It will specify the energy performance rating of the property on a scale from A, being the best, to G, being the worst.
Commercial landlords should be aware of the follow two key dates:-
Landlords of properties which will require energy efficiency improvement works ought to plan early in order to avoid a loss of rent.
Scope of MEES
The regulations apply to all new and renewal tenancies, including also subleases and assignments of existing leases.
The regulations will not apply in the following circumstances:-
Fear not: exemptions apply
The regulations provide for four key exemptions:-
In order to be valid all exemptions must be registered with the PRS Exemptions Register and are only valid for five years.
The potential impact
A landlord will naturally be concerned about the potential need to pay for the improvement of its properties and it may want to ensure that new leases allow for the recovery of these costs from an occupying tenant.
A failure to undertake necessary energy efficiency improvement works could result in an asset no longer generating an income and which has a market value that has been detrimentally effected.
Thresholds for EPC ratings are expected to rise and proactive landlords will look to future proof their assets now by undertaking additional improvement works.
Landlords should undertake an EPC audit and seek professional advice in order to evaluate the extent to which they can recover the costs of any improvement works (if at all).
Tenants of longer term interests and/or those who wish to sublet or assign their leases should especially take note.
The MEES regulations could prevent a tenant from subletting or assigning their leases unless and until the property meets the minimum standard required. Early engagement with the landlord is key should this be a potential issue.
Tenants should take professional advice as to how the impact of the MEES regulations may apply to their particular lease.
Buyers of commercial property may well see increasing opportunities to acquire sub-standard assets which have the potential for immediate improvement and increased value.
Buyers should pay particular attention to the EPC and accompanying recommendation report that is provided. They should also calculate the costs of any immediately required works whilst seeking professional advice in estimating any desired future proofing works.
A failure to properly evaluate the impact of the MEES regulations could result in the acquisition of an asset which requires far greater investment than initially expected.
Failure to comply
Landlords who fail to comply could receive fines of up to £150,000.