Energy Efficiency in Commercial Leases - The Minimum Energy Efficiency Standards one year to go

From 01st April 2018, a new legal standard the Minimum Energy Efficiency Standards (MEES) come into force. 

The requirements for minimum energy efficiency will apply to all rented commercial buildings and poses a threats and also opportunity for landlords, investors, developers and lenders.  We envisage that this will have a marked impact on the property sector.

Why is energy efficiency an issue for commercial landlords?

The new rules originate from the Energy Act 2011 and mean that from 01 April 2018, landlords of buildings within the scope of the MEES Regulations must not renew existing tenancies or grant new tenancies if the building has less than the minimum EPC rating of E (unless the landlord has registered an exemption).  This first stage of implementation could be considered as the transitional period. However from 01 April 2023, landlords must not let or continue to let any buildings which have an EPC rating of less than E (unless the landlord has registered an exemption) it is unlawful to continue to lease the premises.

Commercial landlords therefore need to consider their property portfolios, review any existing Energy Performance Certificate (EPCs) that they hold and where necessary take steps to assess and improve on the EPC ratings of their properties.

Which buildings are captured?

To establish is if a building and tenancy are caught within the scope of MEES is not straightforward. MEES does not apply to:

  • Buildings which are not required to have an EPC: such as industrial sites, workshops, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holidays lets
  • Buildings where the EPC is over 10 years old and there is no obligation to replace it, or where there is no EPC
  • Tenancies of less than 6 months with no right of renewal (this is to capture any attempted avoidance renewals)
  • Long tenancies exceeding 99 years.

Much like the controversial Home Information Packs of the early 2000s which had two conflicting sets of legislation governing its application, the interaction of the relevant regulations for MEES is complex and creates some potential loopholes which no doubt some will look to exploit.
To determine whether a building and tenancy are within the scope of MEES you are required to look at multiple sets of regulations: Energy Performance of Buildings (England and Wales) 2012 and the MEES Regulations themselves.

What are the exemptions?

The exemptions are set out in the Energy Efficiency (Private Rent Property) (England and Wales) Regulations 2015.  The key exemptions are as follows:-

  • The lease is for a term of less than 6 months;
  • All cost-effective improvements (meaning for the purposes of the regulations works that would “pay for themselves” through energy savings within seven years of the date of the work), have been undertaken, or there are no such works that could be done;
  • The landlord is unable to obtain third party consent to the improvements.  This includes the consent of a tenant to enter the property to carry out improvement works where the lease does not permit;
  • An independent surveyor determines that the energy efficiency improvements would devalue the property by no more than 5% or would damage the property – this is of particular importance for listed properties or other properties of historic importance.

What can we do to help you?

Whether landlord or tenant we can review your existing standard lease.  Are the lease provisions effective and enforceable?  We will protect you and your property interests.  Going forward our leases will include the following provisions:

  • A right for the landlord or those authorised by the landlord to enter the premises to carry out all required energy efficiency improvement works, if the tenant (in its absolute discretion) consents.  If the tenant does not consent, then the landlord is protected and can rely on the third party consent exemption mentioned above.
  • A requirement (subject to final agreement in the lease) for the tenant to pay the costs of such energy efficiency improvement works (as it will be the tenant who benefits from the energy savings in the first instance).
  • A prohibition on alterations that would otherwise be permitted if those alterations would adversely affect the environmental performance of the premises.
  • A covenant by the tenant not to apply for an Energy Performance Certificate in respect of the Premises without the landlord’s prior consent.  This is to avoid the possibility of the landlord’s EPC being replaced by a later EPC with a rating below E.
  • A rent review assumption that the premises may be lawfully let at the rent review date.

Should you be have any queries regarding your existing or any future premises that you are interested in, then please contact our Team of Specialist Solicitors. Please call Ian Bowker or Peter Wilson at Terry Jones Solicitors, Telford on 01952 297979 or by email to: ianb@terry-jones.co.uk.
DISCLAIMER: The content of this update is for reference purposes only and does not constitute legal advice.

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