Market Insight

MEES – Expect rising enforcement of non-compliance

June 13, 2023
Since the implementation of the first part of the Minimum Energy Efficiency Standards (MEES) on 1 April 2023, it has become unlawful for a landlord to continue to let a commercial property with a sub-standard EPC rating (of ‘F’ or ‘G’), unless a valid exemption has been registered.

With proposals for the minimum EPC rating to rise further to ‘C’ in 2027 and to ‘B’ in 2030, the issue is becoming increasingly significant in the commercial real estate market – both for landlords and their tenants alike.

We spoke to specialist commercial real estate lawyer, Stephen Baker, of leading international law firm, Womble Bond Dickinson (WBD) to find out more about the liabilities for non-compliance, as well as the exemptions that are available.

Meanwhile, our building consultancy experts discuss the benefits of an EPC Assessment in helping to plan and budget for works to improve EPC ratings, ahead of the anticipated rise in EPC rating requirements from 2027.

When does a MEES exemption apply?

There are specific exemptions which allow commercial properties below the minimum EPC rating to continue to be let. However, these exemptions must be registered on the Government’s PRS Exemptions Register.

The exemptions are personal to a specific landlord and cannot be assigned to a successor. Other than the ‘New landlord exemption’, they apply for a period of five years.

The main exemptions include:

New landlord exemption

This temporary exemption applies where a landlord purchases a commercial property which is already let. The new landlord has a six-month window in which to undertake the requisite improvements and, if the property is still sub-standard once all those improvements have been carried out, register another valid exemption.

Consent exemption

This exemption, which lasts for five years, applies where a landlord has been unable to carry out the required works to a building to improve its energy performance to be compliant, because the tenant’s consent (or that of a third party) is required, and the landlord has been unable to obtain that consent.

Devaluation exemption

This exemption applies where the landlord has not made the relevant improvements because it has obtained a report from an independent surveyor confirming that making such improvements would result in a reduction of 5% or more in the market value of the property. This exemption also lasts for 5 years.

All improvements exemption

This exemption applies where all relevant improvements have been made and the property remains sub-standard.

Seven-Year Payback exemption

This exemption applies where the expected value of the savings from the improvement works over a seven-year period is less than the cost of those works.

What happens if you don’t comply?

“Commercial property owners need to be aware that non-compliance with MEES can result in significant civil (not criminal) penalties, not to mention reputational damage, as businesses focus ever-more on the ESG credentials of those they work with.

“The parties to a lease of a commercial property should also both be aware that a lease remains valid even when there is a breach of MEES and both will remain bound by their respective obligations in the lease,” added Stephen.

Who enforces MEES?

Enforcement of MEES is the responsibility of local Trading Standards, but to date there have been very few instances of enforcement measures being undertaken.

However, given the focus on initiatives in the UK to reach net zero emissions, WBD expects this to change in the near future.

How much could you have to pay out?

If a commercial property is let (or continues to be let) in breach of MEES, you can expect the following penalties:

  • A breach of less than three months: Maximum financial penalty of £5,000 or 10% of the rateable value (whichever is higher), up to a maximum of £50,000.
  • A breach of three months or more: Maximum financial penalty of £10,000 or 20% of the rateable value (whichever is higher), up to a maximum of £150,000.

Reputational damage

As well as (or instead of) a financial penalty, a publication-related penalty can be imposed.

This means your company will be published on the publicly accessible part of the Government’s PRS Exemptions Register, bringing with it potentially adverse publicity and reputational damage for the offending landlord.

Commercial property owners need to be aware that non-compliance with MEES can result in significant civil (not criminal) penalties, not to mention reputational damage, as businesses focus ever-more on the ESG credentials of those they work with.

Specialist commercial real estate lawyer, Stephen Baker, Womble Bond Dickinson (WBD).

Matters to consider and impact on transactions

Stephen explains: “The energy efficiency of buildings is coming under greater scrutiny as part of commercial property transactions by investors, lenders and corporate occupiers alike.

“Investors and lenders will be conscious of the potential effect on the valuation and marketability of buildings caused by a sub-standard EPC ratings as well as the costs required to bring those buildings to a compliant level.”

“Meanwhile, occupiers will be keen to ensure that the energy efficiency of their properties is aligned with their own internal Environmental, Social and Governance (ESG) corporate strategy and compliant to enable it to lawfully underlet.”

In an attempt to deal with the energy efficiency of buildings and the associated obligations and liability for the costs of making improvements, Stephen has also seen the drafting of ‘green’ leases become a more contentious issue, when landlords and tenants negotiate their lease.

“It is important for landlords and tenants to take legal advice regarding these obligations to ensure that they understand the extent of these obligations, as well as how future changes in MEES could affect these,” added Stephen.

What can you do now?

If you still aren’t sure whether your asset or the building you occupy is MEES compliant, it is important to seek professional advice as soon as possible.

Alongside legal advice about energy efficiency obligations of a lease or acquisition of a commercial property, you should also consult with chartered building surveyors to assess the actual energy efficiency ratings of the commercial property or portfolio in question.

This will help you to understand steps you can take to ensure you remain compliant and/or whether there are any exemptions which may be applicable to you, or whether a significant investment is required to bring the building up to standard.

EPC assessments are available at different levels. The right level of assessment is essential to obtain an accurate energy rating for your property.

What happens after the assessment?

Once the assessment is complete you will get a recommendation report which is a good place to start in establishing what additional measures or works are required to improve the energy rating of your building.

Matt Beech, Partner, Building Consultancy at Vail Williams, concluded:

“Completing this exercise in advance of needing a new EPC for your property will allow you the time to plan and budget for the works required to ensure your building remains lettable at the next relevant lease event. These works can then be incorporated into the planned preventative maintenance (PPM) schedule for your building.”

A PPM schedule is a useful management tool to programme and budget for works to your property, including cyclical maintenance and more significant works, such as improvement works to reach the desired EPC rating.

It is designed as a working document and for multi-let buildings it can be used to assist with preparing the service charge budget.

Smiling engineer shaking hands at construction site with happy architect. Handshake between cheerful african construction manager with businessman at bulding site. Team of workers with architects and contractor conclude an agreement with safety uniform.

Who pays for the works?

Building owners and occupiers need to look carefully at their leases to determine the party responsible for the building fabric and services, and therefore who should implement and pay for the improvement works.

Our building consultancy team can provide the technical and property advice necessary to support you as you react to the EPC Regulations which came into force on 1 April 2023.

From pre-acquisition advice and the preparation of PPM schedules, to supporting you to implement improvement works, as well as advising on your dilapidations’ liability, our energy and sustainability consultancy team can help.