The UK government has set a national legislative target of 78% reduction in greenhouse gases by 2035 and a net zero target by 2050. A lot of the responsibility for a large proportion of the necessary action is likely to fall on the real estate sector.

The real estate sector has already shown it is taking steps to combat climate change, such as the introduction of Energy Performance Certificates (EPC). Building on the introduction of EPC's, the MEES (Minimum Energy Efficiency Standards) Regulations were introduced in England and Wales in 2015. The MEES regulations only apply to properties that are required to have an EPC. The current position for commercial property is that it is unlawful to grant a lease of a property with an EPC rating of F or G.

1 April 2023

From 1 April 2023, it will be unlawful to continue to let a commercial property with an F or G EPC rating, even if the lease was granted prior to the MEES Regulations coming into force in 2018. Further, from 1 April 2030, it is anticipated that the minimum standard will be raised to an EPC rating B.

Does it apply to my property?

There are certain types of commercial property and certain very long and short leases that are expressly excluded from the MEES Regulations, but in practice, these exclusions are fairly limited. This means most types of leases will be covered by the rules. This includes periodic tenancies, renewal leases, reversionary leases and will also likely include tenancies at will. It does not include licenses to occupy but these must be genuine licenses i.e., the name of a document alone will not be conclusive. When deciding whether the MEES Regulations apply to a property, this will have to be considered on a property-by-property basis.

How can I make my property more energy efficient?

One of the main ways to improve the energy efficiency of any building is to improve insulation.  Insulation makes the building far more airtight, which reduces heat and energy loss. Other ways to improve the energy efficiency of the property include having heating controls to enable you to adjust the temperature quickly and avoid over usage and introducing renewable energy measures such as solar panels or air source heat pumps.

Penalties

The MEES Regulations do not require a landlord to actually carry out works by law. However, where a landlord 'continues' to let a sub-standard property, it will breach MEES. Local Weights and Measures Authorities (part of Trading Standards) can impose financial penalties ranging from £5,000 to £150,000, based on a property's ratable value. Landlords may also be party to reputational risks as breaches are published on the public register.

Who bears the costs?

Whether the landlord can recover the costs of energy improvement from the tenant will depend on negotiation (in the case of a new lease) and/or an analysis of the lease terms.

The RICS Service Charge in Commercial Property professional statement states "Subject to the terms of the new lease and the principles set out in this professional statement, any subsequent costs of improving energy efficiency might compromise a legitimate service charge item, as long as there is a proportionate cost benefit to tenants". However, there are complexities around the recovery of MEES costs through a service charge, not least because MEES works are likely to be made to individual premises rather than the common parts but the apportionment of costs between tenants with differing lease expiry dates and differing benefit from energy saving improvements.

As a landlord/tenant, what do I need to consider now?

It is important for landlords and tenants to consider the following points to ensure they are ready for the anticipated changes:

1. Landlords must identify properties that may be F or G rates within their portfolios and consider whether any energy efficiency improvements works are carried out and/or whether any of the exemptions apply.
2. To ensure the landlord complies with the MEES regulations, they may have to interrupt the tenant's business on several occasions to carry out works, which is likely to involve costs. The landlord and tenant need to work together to ensure successful and cost-effective compliance with the regulations and their wider ESG obligations.
3. The parties will need to consider whether the terms of the lease dictate not only who will pay for all the relevant improvements but also, how business interruption will be managed and potentially compensated and whether a tenant can lawfully prevent access to the premises for works and how tenant fit-out might impact the position.
4. Tenants who are sub-leasing premises need to be mindful that they will assume the responsibility of the landlord under the MEES regulations.
5. Parties will need to ensure new leases, subleases and lease renewals are appropriately drafted to deal with the opportunities and challenges that the MEES Regulations present to parties. The parties may want to look at implementing green lease clause provisions into the lease such as an ‘Alteration and Improvement’ clause, prohibiting a landlord from carrying out works that will reduce the EPC rating. (Stay tuned as we will be considering green leases in more detail in a separate blog).
6. Landlord's may want to look ahead to 2030 and consider whether it will be more beneficial and cost-effective to aim for a B rating (or as high as possible a rating) before the 1 April 2030 deadline.

Whether you are a landlord, tenant, developer, or lender, if you require assistance in ensuring your property is in line with the MEES Regulations and your businesses ESG objectives, then please do get in touch and we would be happy to assist.