Market Insight

MEES may have 10% impact on commercial lease renewals

January 16, 2017

Minimum Energy Efficiency Standards, or MEES legislation, could have an impact of up to 10% on the value of commercial lease renewals if tenants leverage it as a bargaining chip in valuations, according to a recently published report.

The study from late 2016 was compiled by CO2 Estates, a developer of software to assess commercial buildings’ energy usage, and predicts logically enough that any impact is likely to be seen following statutory commercial lease renewals.

“We find that the risks implied by MEES are real,” the report states. “Valuers will be able to develop highly polarised arguments in rent negotiations depending on whether they are appointed by the landlord or the tenant.”

For tenants in particular, any energy efficiency improvements deemed necessary under MEES could prove to be a valuable bargaining chip during rent revaluations, as tenants could argue in favour of deducting the cost of any such improvements from the rent valuation.

However, the study suggests that in some cases this could be the bare minimum impact on the amount of rent payable – and commercial landlords could potentially find themselves out of pocket by much more than that amount.

“The possible effect of MEES regulations on value ranges from a sum slightly in excess of the cost of relevant energy efficiency improvements, to one considerably in excess of the cost of relevant energy efficiency improvements,” the report adds.

In the most extreme cases, this could see the rented valuation of commercial property drop by as much as 10% due to negotiations over outstanding energy efficiency improvements.

Government figures estimate that nearly a fifth of all commercial property in England and Wales may not fully comply with the requirements of the MEES legislation – worth over £165 billion in total.

This puts the potential cost of MEES in terms of lost commercial rents at around £16.5 billion if each of those affected properties loses 10% of its value during the negotiation phase of commercial lease renewals.

A further issue arises due to the 1954 Landlord and Tenant Act, which interacts with the new MEES rules in a number of different ways depending on the nature of the commercial lease under renewal.

This again falls largely in favour of the tenant, as the 1954 Act means landlords will be unlikely to be able to charge substantial costs to sitting tenants for any green improvements to the property, or to impose new conditions on existing leases that might be seen as forcing the tenant to move to alternative premises.