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Legal Question Time with Gardner Leader: Minimum Energy Efficiency Standards

Potential impacts for landlords, tenants and buyers of commercial property

Legal Question Time with Gardner Leader: Minimum Energy Efficiency Standards

THE Minimum Energy Efficiency Standards (otherwise known as MEES) came into force on April 1.

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 two key dates:

  • April 1, 2018; the commencement of the regulations means landlords are not able to grant new (or renew existing) leases to tenants.
  • April 1, 2023; landlords can no longer even accept rent from a tenant should the EPC rating be an F or G.

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 subleases and assignments of existing leases.

The regulations will not apply in the following circumstances:

  • A tenancy of less than six months that has no right to renewal.
  • A tenancy of more than 99 years.
  • A tenancy where the property is not required to have an EPC

Fear not, exemptions apply

The regulations provide for four key exemptions:

  • An independent assessor determines that all relevant energy efficiency
    improvements have been made.
  • An independent assessor determines the improvements which could be made will not pay for themselves (through energy savings) within seven years.
  • An independent surveyor determines the relevant energy efficiency works are likely to reduce the market value of the property by more than five per cent.
  • The landlord is not able to obtain a necessary third party consent (ie planning
    permission).

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

Landlords

Landlords will naturally be concerned about the potential need to pay for the improvement of their properties and 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

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

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 while
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.

Tim Blackman, solicitor: Commercial Property – Gardner Leader LLP. (01635) 508122
E: t.blackman@gardner-leader.co.uk

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