Commercial properties are required to be more energy efficient now than ever before.
EPCs and MEES
It is crucial for all landlords, investors, developers, and tenants to stay informed about the imminent modifications to MEES (Minimum Energy Efficiency Standards) and EPC regulations. Failure to adhere to the 1st April deadline and comply with the necessary measures may result in severe penalties for any involved party.
From 1st April 2023, the rules for commercial properties are changing. Are you ready?
The government has set a target to achieve a reduction of 78% in greenhouse gases by 2035 and net-zero emissions by 2050. The UK Green Building Council estimated that man-made structures are responsible for 40% of total greenhouse gas emissions in the UK. As part of the government’s plan, the rules on Energy Performance Certificates (EPCs) and Minimum Energy Efficiency Standards (MEES) are changing incrementally until 2030.
What are the current EPC ratings permitted under MEES?
Under the current rules, which apply to properties in England and Wales, landlords of commercial properties are prohibited from granting a new lease where the EPC rating is F or G. These are said to be ‘sub-standard’ properties. The current minimum EPC rating permitted under MEES is E.
A ‘new lease’ also includes any extension or renewal of an existing lease.
What are the exemptions for commercial properties under the MEES rules?
There are various exemptions to this rule, which are:
- Devaluation – where the necessary improvements would damage the property or devalue it by 5% or more you can register a devaluation exemption. You would need to obtain a report from a RICS assessor to rely upon this exemption and any recommendations not covered by the report must still be carried out.
- Seven-year payback – if the landlord can demonstrate that the initial costs of improvements would exceed the energy savings it would generate over the next seven years then this would not be considered a relevant energy efficient improvement.
- Consent – where the landlord cannot obtain the necessary consents to carry out the required improvements (such as from a superior landlord or the local planning authority).
- Improvements already carried out – if the landlord can show that they have carried out all cost-effective improvements to the property (or where there are none to be made) but the property still has a sub-standard EPC rating an ‘all-improvements’ exemption can be registered.
It is important to note that, if you plan to rely upon an exemption, it must first be registered on the government register of exemptions. Also, any exemption must also be renewed every five years for it to continue to apply.
Exemptions are personal and do not pass automatically when the property is sold. Any relevant exemption would need to be registered under the successor’s name.
The main penalty for failing to comply with MEES is a fine. This fine is calculated by reference to the rateable value of the property and the length of the breach, subject to a maximum of £150,000 (per breach). Additionally, there is also the possibility that the landlord’s details will be published on a public register setting out specific details of the breach, causing reputational damage to the landlord.
Non-compliance with MEES is not a criminal offence.
The current rules do not apply to existing leases. This is, however, about to change from April 2023.
1st April 2023 changes
From 1st April 2023, the above rules will apply not only to the grant of new commercial leases (including extensions and renewals of existing leases) but also to the continuation of any existing lease or tenancy agreement of the commercial property.
The exemptions mentioned above continue to apply, subject to the requirement to register and renew any exemption relied upon.
The government plans to require that all commercial properties have an EPC rating of at least B by 2030. It is anticipated that the next change will take effect from 1st April 2027, requiring a minimum EPC rating of C before later rising to B (or higher).
What should you do?
Landlords should review their portfolios to ensure that all existing leases have a valid EPC and consider the current rating.
If your property does not have an EPC, you should contact an energy assessor to arrange a survey. The government website has a function where you can find an accredited assessor local to you by inputting your postcode. As well as creating an EPC, an energy assessor will also prepare a Recommendation Report highlighting potential improvements and the impact this will have on the EPC rating.
If your property is ‘sub-standard’, with a rating of F or G, you should take urgent steps to consider what improvements can be made to bring the EPC rating to a minimum of E. You should also keep in mind the 2027 requirements for an EPC rate of C or higher. Can you take steps now to future proof your property to keep up with the future changes to MEES?
How can Tees help?
The law and guidance surrounding EPCs and MEES are complex and fast-changing. If you wish to discuss this topic further or require advice in connection with a new or existing lease and how the MEES will impact your transaction, please contact our Commercial Property Team. Call our specialist solicitors on 0808 231 1320
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Chat to the Author, Gemma Ball
Associate, Commercial Property, Bishop's Stortford officeMeet Gemma