MEES – the next stage

The countdown to the next stage of the Minimum Energy Efficiency Standard (MEES) is on. All let commercial property will be subject to MEES from April 2023. 

This extension of the scheme should be viewed in the context of a growing commitment to ESG within the real estate industry and many property owners and occupiers having developed ESG policies which will drive improvements to the energy rating of their properties.

The MEES scheme 

MEES have applied to the grant of new leases and lease renewals since April 2018. From 1 April 2023, landlords will be in breach of MEES duties if they continue to let a commercial property that has an EPC rating below E (a “sub-standard property”) unless:

• they have made all possible cost-effective energy efficiency improvements prescribed by the MEES regulations, or 
• one of the exemptions applies.   

Cost-effective energy efficiency improvements are works that fall into one of two categories:

• works that can be paid for by a Green Deal plan. This financing mechanism is not anticipated to become available for commercial properties; and
• works to improve energy efficiency that will pay for themselves within seven years or less. The cost of the works must be less than the projected energy cost saving spread over seven years.

Landlords may claim an exemption and continue to let sub-standard properties if all cost-effective energy efficiency improvements have been carried out at a property or there are no cost-effective works that can be done.

Implications for owners 

Owners of let property should consider the steps outlined in the recent EG article “MEES – the path to greater efficiency” to audit their portfolio. Immediately affected properties should be identified to ensure that they will have an E rating from April, or an exemption will apply. 

It is also important to look beyond an E rating due to the government’s intention to raise the bar for MEES to “B” by 2030.  

Implications for purchasers of let properties  

MEES compliance is now a critically important consideration on acquisition of let properties. Fortunately, there is a short-term exemption of six months for new owners of property. After that, the buyer must ensure that the property complies with the MEES regulations or can claim one of the five-year exemptions, if appropriate.

Exemptions are not a complete escape from MEES. Most last for only five years, although they can be claimed more than once. The exemption, with supporting documentary evidence, must be logged on a public register. 

The five-year exemptions are:

• all cost-effective energy efficiency improvement works have been carried out, or there is none to be carried out. The landlord will need to lodge three supporting quotes on the exemptions register.
• consent is required to carry out works and that consent cannot be obtained or is subject to unreasonable conditions. The regulations provide that reasonable efforts must be made to obtain consent in the case of third parties such as lenders or planning authorities. No reasonable efforts are required in the case of tenants in relation to the premises that they occupy – they have an absolute right to refuse consent.
• an independent surveyor certifies that carrying out the works would result in a reduction in the market value of the property by more than 5%.
• a suitably qualified expert states that carrying out insulation works on external walls would have a “negative impact” on the property.

Exemptions do not pass from owner to owner, which means that from April, buyers will need to carry out their own investigations and, where appropriate, register a new exemption.

It can be time-consuming to claim an exemption, and their applicability and lifespan must be monitored. In particular, obtaining three quotes to support an exemption based on cost-effective works might be an expensive process. Increased energy prices may impact on the cost-effective calculation. 

Who bears the cost?

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

There will be a distinction between works required to comply with MEES Regulations and works that a landlord or tenant may wish to carry out to improve a property’s carbon footprint or energy usage more generally. The position on recovery of costs will differ according to context and individual lettings. 

The key lease provisions to consider are statutory compliance, service charge, consent to works and reinstatement obligations.

The relevance of the statutory compliance clause is uncertain because the MEES regulations prohibit the letting of sub-standard properties, they do not contain direct statutory obligations to carry out works. Also, a landlord may be able to claim an exemption, in which case the MEES regulations will not require works to be carried out. However, with no caselaw to inform the relevance of a statutory compliance clause to the recovery of MEES-related costs, potential remains that a landlord may seek to recover costs by this route. Whilst this uncertainly continues, landlords may find that tenants request a carve-out from statutory compliance clauses as well as service charge provisions. 

The RICS Service Charges in Commercial Property professional statement states “Subject to the terms of the lease and the principles set out in this professional statement, any subsequent costs of improving energy efficiency might comprise a legitimate service charge item, as long as there is a proportionate cost benefit to tenants.

There are complexities around 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 and the apportionment of costs between tenants with differing lease expiry dates and differing benefit from energy saving improvements. 

The Model Commercial Lease contains helpful wording around joint commitments to improving environmental wording and regulates the position regarding EPCs between landlords and tenants. It notes there is no settled market practice around whether the landlord should have an unrestricted right to enter the premises to carry out improvement works. As tenant’s refusal to consent to works can be the basis of an exemption for MEES, the parties may prefer to consider the position on rights to enter on an ad-hoc rather than blanket basis. 

A tenant will want certainty over who can give consent on its behalf and will want to consider whether consent to any works carries potential cost implications. 

Landlords also need to consider whether blanket reinstatement obligations are appropriate. Where a tenant has installed energy saving equipment, the landlord may prefer for this to be retained in situ at lease end.

The future 

Further changes to MEES Regulations and an escalation in energy efficiency requirements should be expected.

In March 2021, the government issued two consultations on energy efficiency relating to commercial properties. The outcome of those consultations is still awaited but they are indicative of the future trajectory for MEES and also display energy certificates. 

The government proposes to extend the display energy certificate regime by introducing a national performance-based framework for assessing energy use and carbon emissions in commercial and industrial buildings over 1,000m2. 

Owners and single tenants of these buildings will be required to submit metered energy use data on an annual basis which will generate a rating for their building. The rating will be disclosed publicly online and in the building. 

The government also proposes to tighten the MEES regime for commercial property so that the minimum standard will be raised to EPC rating B by 2030, with EPC C as an interim step by 2027. This will bring 85% of commercial properties within the regime. 

Some of the key changes proposed for MEES are:

• Compliance at the point of letting the property will be replaced by compliance windows for the years 2025-2027 and 2028-2030. There will be a requirement for all let properties to continually have an EPC, and for any existing exemptions to be reviewed at the start of each window.
• Post-improvement EPCs will become mandatory to demonstrate compliance.
• The requirement for three quotes to meet the seven-year payback test will be replaced by a payback calculator.
• The uncertainties over listed buildings and lease renewals will be resolved with both coming within the regime.
• There will be a new six-month exemption period for properties let on a shell and core basis, and new duties for tenants where they are involved in the fit-out of premises.

Minimum energy efficiency standards for properties are just one part of a larger picture for owners and occupiers of commercial property. 

With more widespread commitment to ESG and higher energy costs, it is in the interests of all to reduce the carbon footprint of a property whether owned or occupied.  

This article was first published in EG on 15 October 2022