With less than a year to go until the Minimum Energy Efficiency Standards (MEES) kick in for commercial properties, it's crucial for landlords to focus on MEES.
Here we'll look at some points to consider if you're granting a lease of a commercial property with an EPC rating of F or G, for a term lasting beyond April 2018.
Quick recap – what is "MEES"?
From April 2018, it will be against the law to grant a new lease of commercial property with an EPC rating of F or G.
From April 2023, it will be against the law to continue to let a commercial property on an existing lease with an F or G rating.
Unless, in either case, an exemption applies. Certain leases are excluded from MEES altogether, such as a lease for a term of less than six months, or for a term of 99 years or more.
Is your EPC accurate?
The first step is to consider now whether any existing EPC is correct. When the building was assessed the more information given to the assessor, the more accurate the EPC will currently be.
Even if the EPC shows a D or E rating, if it was based on inaccurate assumptions, then a revised rating could now be lower (but also higher). Changes to the building regulations may also result in a lower rating.
So it might be worth getting a new EPC prepared. This can be done in draft first, in case the rating is lowered.
Do you want to do energy improvement works?
If your property has an F or G rating, is it economically feasible to do the upgrade works now?
Including them in the landlord's works or the tenant's fit-out may be the best course of action. Lease expiry is the obvious time to do upgrade works and this is in line with the Government's vision behind the new rules.
If you're unsure whether to do the works now and the term of the lease extends beyond April 2023, remember to consider whether one of the exemptions will apply at that time. Otherwise the lease will become unlawful in 2023 and you'll be liable for a fine of up to £150,000.
What should the lease say about MEES?
If you decide to grant a lease now without carrying out the works, careful thought needs to be given to the drafting of the lease:
- MEES costs
Should a lease give the landlord a right to put the costs of complying with MEES through the service charge? And will a well-advised tenant accept this? E.g. if a landlord is replacing old plant and machinery at the property, it may be fair for the landlord to recover the costs of installing more efficient plant.
- Landlord's right to do energy improvement works
Some landlords may prefer not to reserve an express right in the lease to enter the premises and do these works. Then if the tenant refuses consent to the works, you would have an exemption to rely on in 2023.
- Rent review
If there's a rent review, the landlord will want MEES to be ignored on review. The rent already takes into account the condition of the property, including the low energy rating. So there should be an assumption that the property may be lawfully let.
However the tenant may argue this is onerous. In particular, if subletting is permitted, then after April 2018 the tenant won't be able to sublet unless they carry out works, or can rely on an exemption. So the tenant may argue the rent should be discounted to take this into account.
[Please get in touch with a member of our real estate team if you have any queries about how MEES may affect your properties. As the key date of 1 April 2018 approaches, we'll be running further updates on this topic.]