Impact of MEES on the commercial real estate sector

New legislation that came into effect on 1 April 2023 could leave £1.4bn worth of annual rent at risk in the commercial property sector in England, according to data from EG.

The Minimum Energy Efficiency Standard (MEES) has applied to the granting of new leases and lease renewals since April 2018. From 1 April 2023, landlords will now be in breach of MEES duties if they continue to let a commercial property that has an EPC rating below E.

The data from EG – a provider of data, news and analytics for real estate - examines the impact that the latest phase of the legislation could have on the commercial real estate market in England.

In London, 24.1m sq ft of commercial space could fail to meet these regulations, putting the equivalent of 20 Shard’s at risk. Across the whole of England, this number rises to 95.6m sq ft.

On MEES, Liz McKillop Paley, real estate principal associate at Shoosmiths, said:

“The new rules enforced from 1 April 2023 only apply if a building falls under MEES regulations and where there is a valid EPC. If a property is vacant, it can remain so without an EPC. The risk of not making improvements, however, is that a landlord could be left with a stranded or obsolete asset. 

“Landlords may claim an exemption or continue to let sub-standard properties if all cost-effective energy efficiency improvements have been carried out at a property or if there are no cost-effective improvements that can be made. Other exemptions may also apply.

“Cost-effective energy efficiency improvements are 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.

“Carrying out cost-effective energy efficiency improvements and meeting the EPC standards – even through making small upgrades during a building’s life cycle - can have a big impact, ensuring a landlord complies with the regulations as they evolve, while also avoiding being left with a property that the market deems substandard.”

The regulations are expected to become stricter, with the minimum EPC rating rising to C in 2027 and B in 2030. This could see the level of regional rent at risk increase to £3bn and £4.8bn respectively.

Tom Flanagan, product manager at EG, added:

“The CRE market will undoubtedly take a significant hit following the introduction of this new EPC legislation. With billions worth of rent taken off the market and assets left stranded, we can expect to see rental premiums put on energy efficient buildings and competition for properties increasing.

“For many CRE landlords, now is the time to take action as the EPC regulations only strengthen over the coming years. By acting now, landlords can ensure their properties are compliant for the years to come and - most importantly - meet the market demand for energy efficient, sustainable buildings.”

For further guidance on MEES, please read: MEES – the next stage.