Reasons to choose Wilson Browne
With the 2021 United Nations Climate Change Conference (COP26) beginning 31 October in Glasgow and everyone looking at the future of environmental pledges and legislation, it’s probably a good time to reflect on the Minimum Energy Efficiency Standards (MEES) regulations.
MEES were introduced in 2016 by the not so imaginatively named Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015. The regulations introduced a prohibition on granting new leases of property if the property was substandard (has an EPC rating of F or G) which came into effect on 1 April 2018.
This prohibition was extended on 1 April 2020 to existing domestic leases and is due to extend to commercial property from 1 April 2023.
While these prohibitions do not affect the validity of new or existing leases, landlords should be cautious of enforcing authorities who can impose fines of up to £150,000 (for commercial properties) and can publish the details of the breach on the publically available PRS Exemptions Register potentially causing additional PR damage.
Additionally, intermediate tenants should be cautious as granting (or continuing) subleases will make them landlords for the purposes of the MEES regulations.
For an idea of the scale of the problem this will cause, according to Colliers 20m sqft (or about one in ten) of London’s offices fall short of the current standard and will require heavy investment to reach an E rated EPC.
To add to this bleak picture, the Government has long been signalling that the sub-standard benchmark of an EPC rating of E is likely to be reviewed upwards for both commercial and domestic properties in future years.
The 2020 Energy white paper confirmed that the future trajectory for the non-domestic minimum energy efficiency standards (MEES) will be EPC B by 2030, and the current consultation on a proposed framework is under review including increasing the minimum threshold to a C rating in 2027.
We expect that given the current pressures on construction many landlords will not be able (even if they are willing) to make the necessary investment before the deadline in 2023 and those that are will have an ongoing and uphill struggle as the minimum threshold continues to rise as we move towards 2030.
The result will be a large number of landlords seeking to rely on one (or more) statutory exemptions including:
- There are no more cost effective improvements that can be made; or
- They are unable to secure access or the necessary consents to carry out the works.
Meanwhile, increasingly there is pressure from landlords to push the costs of improvements onto tenants, who will ultimately benefit from the reduction in energy costs, whether through service charges or including obligations on tenants to carry out the improvement works.
Unsurprisingly, tenants are reluctant to accept these increased costs especially those in shorter term lease arrangements, who see that energy efficiency improvements enhance the landlord’s underlying asset, and are generally resisting the imposition of these new obligations.
While most leases contain obligations on tenants to comply with legislation, due to how the MEES regulations are drafted these normal obligations aren’t triggered and the obligation remains with the landlord to deal with the consequences of a property being substandard.
This is emphasised by the Court’s decision in Poundland Limited v Toplain Limited earlier this year in which the Court (at the request of the tenant) ordered the insertion of a “MEES clause” to clarify that the landlord (if required by the MEES regulations) would meet the costs of any works to bring the property up to the relevant efficiency standard.
Perhaps surprisingly we have seen no evidence that the EPC rating of a property is having much (if any) impact on the rental level that a property can command. This would suggest that at present the EPC rating of a property is not yet having a material effect on the underlying capital value of properties.
However, with April 2023 approaching, construction delays continuing, and the current focus on climate change, it may be that we will begin to see green investment pressures coming to bear on prices.
Turning to what can be done, it is clear that there are benefits to all parties involved in carrying out energy efficiency improvements provided that a number of factors are appropriately dealt with. Including keeping disruption to tenant occupation minimised (to prevent disruption to the tenant’s business and to the landlord’s rental income) and allocating the costs and benefits of the works in a fair and proportionate manner.
Given that the average lease term is now just under 7 years, many of the leases granted now will still be in effect when the minimum C rating is proposed to come into effect and many longer leases (or those protected by the Landlord and Tenant Act 1954) will still be in effect when the minimum becomes a B rating.
It will be interesting to see in the coming years whether there is an increase in tenants using the existing statutory route to obtain compensation for improvements, whether the new framework will include a more effective statutory mechanism, or whether landlords will positively engage with tenants to address the potential benefits of improved energy efficiency.