Scope Of MEES Regulations Is Widening For Commercial Property

MEES Regulations: What Is Changing?

More commercial landlords and their tenants are soon to be affected by the MEES energy efficiency regulations because their scope is due to widen.

From 1 April 2023 it will be illegal to let a qualifying commercial property if it has a sub-standard energy efficiency rating.

Beware – the MEES Regulations are complex and are sometimes contradicted by the Energy Performance Certificate (EPC) rules. So it pays to get specialist legal advice.

Who Should Worry About The MEES Regulations?

If you’re a private residential landlord, or if you’ve granted a commercial lease since 1 April 2018, then you should be familiar with the ‘minimum energy efficiency standard’ (MEES) regulations and should already be complying with them (unless your property is exempt).

It is important to note that MEES – the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) – does not use the terms ‘commercial’ and ‘residential’.

Instead MEES refers to ‘non-domestic private rented (PR) property’ and ‘domestic PR property’:

• non-domestic PR property covers most – but not all – commercial property
• domestic PR property covers some – but not all – residential property.

And confusingly, the definitions of domestic PR property for Part 2 and Part 3 of the MEES Regulations are different! However, as a commercial landlord (or tenant), it is Part 3 of MEES that concerns you…

When Should I Worry About MEES?

It is the EPC rating of a property that triggers MEES. Properties in the two lowest bands of this A-to-G scale are defined as “sub-standard”.

But under government plans, E-rated properties could join F- and G-rated properties in the energy-efficiency sin bin too. So property purchasers will need to consider:

• the cost of improving the property so that it is not sub-standard
• the feasibility of passing this cost on to the tenants
• whether the property qualifies for any possible exemptions from MEES.

Although the MEES Regulations are strictly a cost for the landlord, they may seek to recover that cost from the tenant.

Whether you’re a landlord or tenant, it is essential to seek the appropriate legal advice when entering into a new lease to ensure that your position is protected as far as possible.

Importantly, MEES doesn’t apply if you are the owner-occupier of the property.

Should I Improve The Property, Register For An Exemption, Or Do Nothing?

It is essential to get legal advice before acting because MEES may not apply to your commercial property.

From a legal point of view, you may not be obliged to improve the property (though you may have to register a PRS Exemption).

There are four important questions to consider:

1. Does MEES apply to my commercial property?
2. Will I need to register a PRS Exemption to avoid enforcement action?
3. Will I have to carry out energy-efficiency improvements to the property?
4. Will a combination of questions 2 and 3 apply?

Furthermore, there are caps to costs. In commercial properties, the landlord can apply for an exemption if it would not pass the seven-year payback test (the energy-saving improvements would not pay for themselves within seven years). That compares with a £3,500 maximum threshold for domestic properties.

Contradictions Between The MEES And EPC Regulations

A key question is whether an EPC certificate is needed for a lease renewal.

Part 3 of MEES currently applies only where a property has a valid EPC. So, where a lease is being renewed and there is no valid EPC for that property (and if no new EPC is triggered) – then MEES will not apply to that renewal.

However, before reaching this conclusion, the landlord must first consider whether a new EPC is needed on a lease renewal.

The EPC Regulations require an EPC to be produced only on a sale or let. The EPC Guidance suggests that no EPC is needed on a lease renewal.

And yet, the non-domestic MEES Guidance suggests that – with no valid EPC for a property – an EPC would be needed on renewal.

At this stage, it is uncertain which way the courts and authorities will jump when it comes to enforcing the rules.

But remember – the whole point of all this legislation is to save energy. Often it is safer to assume that you will need an EPC.

However, obtaining an EPC may result in a grade that falls foul of the MEES Regulations. So – for the moment – it’s a good idea to have your commercial lease drafted in such a way that it prohibits the tenant from obtaining an EPC without consent. There’s no suggestion that this position is going to change but we’ve seen how ‘pro-tenant’ the government has been recently with regard to domestic property leases.

What MEES Part 3 Exemptions Might Apply?

MEES Part 3 does not apply if:

• the commercial property is not sub-standard (it has a valid EPC certificate with a rating of E or higher)
• the commercial property is not ‘non-domestic’ under the terms of MEES
• it is not in England or Wales
• it is classified as a dwelling under the terms of MEES
• the tenant or a third party has refused consent for the energy efficiency improvement works
• the landlord obtains an independent surveyor’s report which states that making the relevant energy efficiency improvements would reduce the market value of the property (or the building of which it forms part) by more than 5% – the government expects this exemption to be infrequent
• you have made all the energy efficiency improvements possible but the property still remains sub-standard.

It may also be possible to obtain a temporary exemption – typically six months – but the rules governing this are quite complex so it is important to take legal advice before applying.

And even if an exemption does apply, you may need to make annual applications for it and demonstrate that you are still eligible. For example, where a tenant has previously refused consent, you would need to demonstrate that they are still refusing consent.

Get Expert Legal Advice On Commercial Property Law

Contact Associate Solicitor Charlotte Lilley for expert legal advice on MEES, EPC regulations and other aspects of commercial property law. She is based at our Poole office.

Charlotte specialises in freehold/leasehold sales and purchases, assignments of leases, grants of new leases, options and conditional contracts, business sales and purchases, commercial property finance, site acquisitions, plot sales, setting up and structuring development sites, licensed premises and charity incorporation.