Ben Price, Commercial Real Estate Partner at DMH Stallard, sets out the main issues to consider to avoid substantial penalties. Ben comments:
“The penalties for breach of the Minimum Energy Efficiency Standards Regulations (often called the “MEES Regulations”) can be substantial, with the maximum penalty for non-domestic property being £150,000. A further penalty is the entry of details of the breach on a public register, causing potential reputational damage for Landlords”.
He advises all commercial Landlords to be aware of their obligations under MEES Regulations. It has been unlawful since 1 April 2018 for a Landlord to grant a lease of “sub-standard” commercial premises, unless an exemption applies, but the law is to be subject to a material extension on 1 April 2023.
“Sub-standard” currently means an “F” or “G” rating on an Energy Performance Certificate (“EPC”).
Time is not on the side of Landlords with sub-standard properties
On 1 April 2023, in just a few weeks, it will be unlawful for Landlords to continue to let sub-standard premises. This is an important extension to the law given that at present the trigger is the grant of a lease. Landlords who have granted leases well before 1 April 2018 may now face liability under these regulations if the property is sub-standard.
It is not always straightforward to assess whether, as a Landlord, you will be caught by these regulations. First, there must be an EPC for the regulations to “bite”, so it will be necessary to assess which properties in an investment portfolio have or should have EPCs, as there are exemptions for some buildings (for example, those without heating or air-conditioning).
Secondly, simply owning a building is not enough for an obligation to have an EPC to arise, as EPCs are only required, broadly speaking, on the sale or letting of property. Landlords will need to consider their transactions carefully to determine whether the requirement for an EPC has been triggered. The answer here is not always obvious, with, for example, assignments of leases being caught. It is also worth considering whether the current EPC for the Property has expired or has been invalidated by works carried out at the building.
Lastly, even if an EPC is required for a particular building on a particular transaction and that EPC shows a sub-standard rating, the Landlord may be able to apply for an exemption, although a number of exemptions apply in fairly narrow circumstances (for example, in certain circumstances, where the relevant energy improvement works would devalue the Property) or are temporary in nature.
Tenants too will be interested in the regulations tightening. Most leases make Tenants liable for the cost of utilities consumed in their premises, whether directly or via a service charge type arrangement, and so Tenants will want to know about the energy efficiency of premises they are taking, not least given the enormous increases in energy costs that we are seeing. Even in the unusual circumstance where the Landlord charges a rent that includes energy costs, they are likely to assess that rent based upon the rising cost of providing utility services. Maintaining or improving the energy efficiency of a building so that it can be lawfully let represents an additional cost to Landlords. Tenants will therefore need to be mindful of the risk of the costs being passed on to them, either directly through their lease or indirectly via the service charge in a multi-tenanted building. Whether or not a Landlord is able to do this will depend on the wording of the lease in each case.
A government consultation looking at what the minimum energy efficiency rating should be for non-domestic buildings in 2030, in just seven years’ time, concluded that the target should be a “B” rating. A further consultation sought views on introducing a minimum “C” rating by 2027, in only four years.
The chart below shows that the threshold for sub-standard property being raised in such a way is likely to bring many more properties within the remit of the MEES Regulations, in a relatively short timescale.
Percentage of performace certificates lodged in 2022*
*Source: https://www.gov.uk/government/statistical-data-sets/live-tables-on-energy-performance-of-buildings-certificates#epcs-for-non-domestic-properties
With more and more property being designated as sub-standard over the coming years, both Landlords and Tenants would do well to assess their current portfolios for energy efficiency and potential liabilities under the MEES Regulations as soon as possible.
Ben Price and his team at DMH Stallard handle all elements of commercial real estate work, acting for owners, occupiers and lenders across a range of sectors. Ben has a particular interest in property management and Landlord and tenant matters, handling high value and complex lease negotiations to secure the best possible outcomes for his clients.
For more information, please contact our Real Estate team.