Chartered Surveyors Commercial Property Consultants. The Minimum Energy Efficiency Standards: A Guide for Commercial Property

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1 Chartered Surveyors Commercial Property Consultants The Minimum Energy Efficiency Standards: A Guide for Commercial Property

2 2 WHAT ARE MEES? The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015, are known in the industry as the Minimum Energy Efficiency Standard or MEES. This is secondary regulation that was passed in March 2015 following the UK Energy Act of KEY POINTS: Minimum Energy Efficiency Standards (MEES) will make it unlawful for properties with F or G Energy Performance Certificates (EPC) to be let, without implementing cost effective energy efficiency improvements or fulfilling an exemption criterion. MEES come into effect on 1 st April 2018 for new leases and lease renewals/extensions where there is an EPC already. MEES comes into effect on 1 st April 2023 for all existing leases. WHY HAVE THESE MEASURES BEEN INTRODUCED? The built environment has been identified by Government as a major contributor to greenhouse gas emissions and is therefore an important sector to regulate if the UK is to meet its carbon reduction targets for 2020 and Estimates issued by the government state that 18 per cent of commercial properties are likely to fall within the lowest EPC ratings of F or G. While Building Regulations ensure that new properties meet current energy efficiency standards, MEES will tackle the existing building stock in England & Wales. It is also very important to note that the minimum standards are likely to rise in future. TO WHAT PROPERTIES DO THE REGULATIONS APPLY? The Minimum Energy Efficiency Standards will apply to all rented properties with a valid EPC, both domestic and non-domestic, in England & Wales and with leases of longer than six months and shorter than 99 years. Scotland is not affected by MEES but is subject to similar regulation. If a property does not have an EPC then the regulations will not apply to it. WHAT ARE THE PENALTIES FOR NON-COMPLIANCE? The MEES Regulations will be enforced by Local Authorities who will have powers to impose civil penalties which are set by reference to the property s rateable value.

3 3 The penalty for renting a property for a period of less than three months in breach of the MEES Regulations will be equivalent to 10 per cent of the property s rateable value, subject to a minimum penalty of 5,000 and a maximum of 50,000. After three months, the penalty rises to 20 per cent of the rateable value, with a minimum penalty of 10,000 and a maximum of 150,000. Where a property is let in breach of the MEES Regulations or where a penalty is imposed, the lease between the landlord and the tenant remains valid and in force. WHAT ARE THE EXCLUSIONS & EXEMPTIONS? The key exemptions where property with a low energy rating can be let are: a. all cost effective improvements, being works that would pay for themselves through energy savings within seven years, have been undertaken, or there are no such works that could be done; b. a landlord is unable to obtain third party consent, for example from the planning authority, lender, superior landlords or consent from the tenant under a lease to enter the property to carry out improvement works; c. an independent surveyor determines that the energy efficiency improvements would devalue the property by more than 5% (such as providing thermal insulation to the internal face of external walls) or would damage the property. Exemptions last for five years and to qualify for an exemption a landlord must register the exemption that it is relying upon. Exemptions do not pass from one landlord to another. Where a landlord buys a property already subject to leases, or where a landlord is required to grant a lease pursuant to a statutory or contractual obligation to do so, such as on a lease renewal, the landlord is not in immediate breach of the regulations. It has six months to comply or to determine that one of the principal exemptions apply. WILL THE GOVERNMENT IMPLEMENT MEES Since the General Election in May 2015, doubts have been raised as to whether the Government will actually implement MEES in 2018 due to opposition to the policy from the property industry. Brexit could also provide the opportunity to repeal the Energy Performance of Buildings (England and Wales) Regulations 2012, which underpin the

4 4 MEES Regulations, because these implement the EU Energy Performance of Buildings Directive The underlying policy for the MEES Regulations originated in the UK not the EU and the MEES Regulations remain on the statute books. Accordingly we would recommend that parties therefore assume that MEES will apply from 1 st April The underlying policy for the MEES Regulations originated in the UK. HOW DO MEES IMPACT UPON COMMERCIAL INVESTORS? Landlords are likely to be the most affected parties because the key obligations and restrictions in the MEES Regulations fall on them. We have considered the implications of MEES on commercial landlords and set out below a summary of our opinions of the key implications. 1. Investors will be unable to renew / regear leases of non-compliant properties from 1 st April Investors will be unable to relet vacant noncompliant property from 1 st April Investors will be liable for penalty payments for any let non-compliant properties from 1 st April Properties with F or G ratings are likely to prove increasingly difficult to sell as we approach April 2018 and the market becomes aware of the commercial implications of the legislation. E ratings will also have potential to impact on value as the market anticipates escalation of the legislation. 5. We do not expect commercial mortgage lenders to accept properties with an F or G rating as loan security. We also expect them to be cautious in respect of properties with an E rating. 6. We consider there is potential for rents achievable at rent review and statutory lease renewal to be impacted by the regulations. If the tenant could claim that they have been or will be adversely affected by a low EPC rating (such as inability to sub-let, having costs to bear in spending on improvements or suffering disruption as a consequence of the landlord entering the property to make improvements).

5 5 HOW DO MEES IMPACT UPON COMMERCIAL TENANTS? The structuring of MEES places the key obligations and restrictions on landlords however tenants should ensure that they obtain professional advice. We set out below our opinions of the key implications on commercial tenants. 1. A tenant may need to underlet and will be subject to the requirements of MEES in this scenario. 2. The terms of an existing lease or the terms sought by a landlord in a new lease may shift the responsibility and costs burden onto the tenant. 3. A tenant may find their landlord requesting access in order to undertake improvement works which may present an opportunity for tenants to leverage their position in order to negotiate a preferential lease regearing or the completion of other required works. 4. A tenant may, dependant on the terms of the lease and their MEES compliance position, be in a position to obtain an EPC in order to have a preferential impact upon rent review outcomes or to strengthen a request to their landlord to undertake improvement works to the property. 5. Tenants acquiring new units may have the opportunity to extract concessions from landlords of low rated properties. 6. MEES will also impact tenant s dilapidations and reinstatement liabilities. Landlords may seek retention of elements of tenant s fit out alterations in order to avoid adversely affecting EPC ratings. There will also be risk presented by undocumented alterations as well as landlords seeking to restrict tenant alterations which may adversely impact EPC ratings. HOW ARE LEASES CHANGING TO TAKE ACCOUNT OF MEES? 1. Alterations There may not need to be a specific mention within the lease however we consider that it would be reasonable for landlords to withhold consent where an alteration by a tenant will have a negative impact upon the EPC rating of the property. For landlord s we consider it essential to ensure that any tenant s alterations are properly considered and Environmental Performance Modelling is undertaken if appropriate prior to consent being documented. For tenant s we consider that obtaining advice in respect of the lease prior to undertaking alterations is of great importance since we see potential for landlord s to incur losses which may be recoverable from the tenant as a result of non-consented alterations.

6 6 2. EPCs The Model Commercial Lease requires that a tenant may not obtain or comission an EPC on the premises unless authorised to do so by the Landlord unless required to do so by the EPB Regulations. If the Tenant is required to obtain an EPC, the Tenant must (at the Landlord s option) obtain an EPC from an assessor approved by the Landlord or pay the Landlord s costs of obtaining an EPC for the Premises. These restrictions are important to control the commissioning of EPCs. 3. Sustainability Improvement Costs The Model Commercial Lease now includes provision that the Tenant must pay the costs incurred by the Landlord in carrying out works to the Premises to improve their Environmental Performance where the Tenant, in its absolute discretion, has consented to the Landlord doing so and the landlord will have the right to enter the Premises to carry out any such works to which the Tenant has given its consent. The Tenant is the party that stands to benefit from the improvements as a result of reduced energy bills. The discretion as to whether the works should be undertaken remains with the Tenant (since it is they who will be paying the costs in this structure), on the basis that if they refuse then the landlord may obtain an exemption from the MEES Regulations on the basis that consent from the tenant to undertake works cannot be obtained. WHAT SHOULD COMMERCIAL PROPERTY TENANTS & OCCUPIERS DO NOW? Firstly you should review your lease to understand your rights when it comes to MEES. You should also understand how MEES may impact other provisions within your leases, and audit your estate portfolio for compliance. You should ensure that you seek professional advice before entering into any negotiations with your landlord regarding a lease renewal, regear, rent review or alteration to ensure that you understand the potential impacts of MEES. WHAT SHOULD COMMERCIAL PROPERTY INVESTORS DO NOW? Boddy & Edwards have established a strategy for commercial investors to understand the extent to which their investment portfolio may be affected by MEES and can advise upon and implement measures to minimise the commercial impacts, in order to ensure compliance at the required time. Please contact us if you would like to discuss this further. 4. Yield up There is argument for a requirement that the tenant should yield up the premises with an EPC rating no lower than the minimum energy efficiency standard rating from time to time. This may however be considered as an improvement. A requirement that the premises be handed back with a rating at least the same as at the date of the letting may therefore be more realistic. This is however likely to remain a contentious issue; development of the Building Regulations is likely to enhance the requirements of current ratings (i.e. a building currently assessed as a C rating may be classed as a D if reassessed in the future under more demanding Building Regulations.

7 7 ABOUT BODDY & EDWARDS Boddy & Edwards is a firm of Chartered Surveyors and Commercial Property Consultants, founded in 1989, who provide commercial property consultancy services to investor and occupier clients throughout the UK. Our retained Elmhurst Certified Level 4 Non- Domestic Energy Assessors provide technical support consultancy services to two EPC Accreditation Schemes, Elmhurst Energy Solutions and Sterling Accreditation and are experts in the field of energy performance modelling. Our collaborative approach to MEES compliance is unique in utilising detailed energy performance modelling overseen by a qualified Quantity Surveyor, providing accurate cost / benefit advice for performance improvements which is combined with expert lease consultancy advice in order to develop the optimum compliance strategy. KEY CONTACTS David Boddy MRICS DDI: david@boddyandewards.co.uk Barry Munday MRICS DDI: barry@boddyandewards.co.uk