The government has confirmed that more changes are coming to the MEES regulations and EPC. While the implementation timeline has not yet been confirmed, the likely practical implications can already be identified. The government’s stated intention is for all properties to hold at least an EPC C rating by 2030. In theory this is a positive change and will bring a positive consequence to the environment but in practice there remain a number of outstanding practical and regulatory questions.
Implications for landlords
- Non-compliant property cannot be lawfully let
At the moment if property has an EPC rating of F or G, it cannot be lawfully let or continue to be let unless an exemption is valid and registered. This applies to both new leases and existing tenancies. This in turn could lead to delays in completions and failed renewals.
- Increased costs
In order to ensure that a property is MEES compliant, many properties require energy efficient improvements to be made. Many of these changes can be significant and can come at a high cost, all of which may not be recoverable through rents and service charge depending on the drafting of the lease, particularly for leases already in place.
- Due diligence and disclosure burden
Buyers and funders are increasingly scrutinising EPC ratings and exemption registrations as non-compliance is now treated as a material risk to the value of the property rather than a defect. This puts a burden on the landlord as they must ensure the EPC is current and valid, exemptions are properly registered and the energy performance risk is disclosed.
Implications for tenants
- Delayed occupation or failed transactions
Where a landlord cannot demonstrate MEES compliance at completion or upgrades are still pending, the tenant will be unable to occupy the property. This can delay fit out, disrupt business planning and result in failed transactions where compliance issues are complex.
- Contribution to costs
Even though the onus is on the landlord to ensure the property is compliant, the tenant may be required to contribute. Depending on the lease terms this can be directly or indirectly through service charge, landlord covenants to recover upgrade costs and restrictions on tenant alterations affecting the EPC.
- Restriction on use and alterations
Green lease provisions are increasingly restricting tenant alterations that could negatively impact the building’s EPC rating. While the aim is to aid compliance, these clauses may limit flexibility on what the tenant may do with the property once in occupation.
Shared tension: who pays and who is in control?
The key takeaway for the upcoming reforms to the MEES structure is that there is likely to be growing tension between the landlords and the tenants over who ultimately pays for the upgrades and how future regulation is drafted into a lease.
While landlords face direct regulatory exposure, tenants are understandably reluctant to risk inheriting uncertain and costly obligations. Going forward with this in mind, careful planning and clear contractual allocation of risk will be increasingly important.
Contact our expert Real Estate team to learn how we can best assist you as a landlord with the changes to the MEES regulations and EPC here.