Minimum Energy Efficient Standard (MEES) – A Guide for Landlords
The Minimum Energy Efficiency Standard (MEES) came into effect in England and Wales on 1st April 2018. This makes it illegal to rent either commercial or domestic premises that have an EPC rating of less than “E” unless the landlord has registered an exemption.
Around half of the UK’s commercial property is owned within investment portfolios and 20% of that falls within a “F” or “G” rating. That’s around £130 000 000 000 of property stock.
Property that currently falls below the threshold will need to be improved in order to be raised above it unless exemptions (improvements have to be “permissible”, “cost effective” and “appropriate”) apply.
Where exemptions will not apply portfolio owners have a choice between:
- Carrying out improvement works;
- Sale of the asset; or
- Development of the asset.
It’s worth making the point that carrying out energy improvement works to buildings is no bad thing in and of itself and much of the accompanying guidance to the legislation points out that the cost of works ought to be recoverable through energy savings over the short to mid-term. They would, though, represent a capital outlay that not all portfolio owners would be happy to incur and the savings may not automatically find their way back the landlord, depending on how any lease is structured.
There are other more subtle dangers that need to be borne in mind in the context of the MEES:
- In 2023 it will become illegal to continue to rent commercial property that falls below the standard (unless an exemption applies). It’s difficult to see at this point how this will be policed but, clearly, investors need to be analysing their portfolios to see how this is likely to impact upon them.
- This impact of MEES is likely to be felt when negotiating with tenants, particularly at lease renewal where leases are protected by the Landlord and Tenant Act 1954 and also where sub letting occurs during a lease term.
- There is a possibility that the threshold may be increased to “E” in the relative short term. Were this done this would pull a further 17% of the UK’s commercial investment stock below the threshold, although it’s far from clear what appetite the government may have to press ahead with this in a post Brexit landscape.
- There is also a perception that pre-2012 EPCs may have been assessed against a weaker set of criteria than more recent surveys and so landlords would be well advised to have any pre-2012 EPCs re-assessed.
We are recommending to our investor clients the following course of action:
- A review of all existing EPCs within portfolios to identify:
- properties that fall below the threshold;
- pre-2012 surveys; and
- properties that might fall below a raised threshold.
- An analysis of whether exemptions on effected properties can be claimed.
- An analysis of occupational leases to map:
- Possible points at which any MEES issue might be triggered or else raised. For example, break dates, lease expiry dated, rent review dates and points of possible sub-letting.
- A further analysis of occupational leases to determine whether the cost of improvement works can be recovered from tenants, whether there are any barriers to gaining physical access to carry out any improvement works and whether a tenant can be prevented from triggering the requirement for an EPC.
- The establishment of a risk mitigation strategy that can be implemented in the run in to 2023.
This article was written by James Davies.