1. Introduction
The Energy Efficiency (Private Rented Property)(England and Wales) Regulations 2015 (the "MEES Regulations") brought the Minimum Energy Efficiency Standard ("MEES") into force. The Regulations have applied in respect of the grant or renewal of commercial leases from 1 April 2018, and will bring MEES into force in respect of continuing commercial leases on 1 April 2023, setting a minimum threshold of an E rating on an EPC for landlords to grant, or continue to let, commercial premises without a registered exemption, at risk of a fine. MEES also applies to residential/domestic premises, which is outside the scope of this note.
This legislation was widely anticipated for many years, as the Energy Act 2011 contained provisions that enabled the government to make regulations for a minimum energy performance standard, and there was industry speculation from 2010 onwards about what form the legislation might take. The draft MEES Regulations were published in 2014, and were made in March 2015; since then, commercial landlords and tenants have been trying to work out how to adapt to these requirements.
Government guidance, first published in February 2017, helped to clarify how MEES should work in practice, but has no legal effect and so cannot be relied upon.
The government launched a public consultation in 2019 on its proposals to amend the MEES Regulations to raise the minimum standard for MEES from E to B or C. The conclusion of this consultation is that the minimum standard should be raised to a B in 2030. A further consultation was published on 17 March 2021 that focusses on, and responds to, concerns and challenges around compliance and enforcement in the light of that increased minimum standard. The consultation is due to close in June 2021 and the response will be published in late 2021 with subsequent amendments to the MEES Regulations timetabled to come into force on 1 April 2025.
This note seeks to bring some key themes to light in order to assist commercial property owners and occupiers in complying with the law. However, it is no substitute for, and must not be relied upon instead of, taking specific advice on the application of the law to each set of facts and circumstances.
2. What is MEES?
The aim of MEES is to improve the energy efficiency of buildings. The energy used to heat and power commercial buildings accounts for approximately 12% of the UK's carbon emissions each year and, with approximately 60% of today's non-domestic buildings still likely to be standing in 2050, that proportion will increase if action is not taken to improve existing building stock.
MEES seeks to incentivise landlords to achieve this aim, by making it unlawful for them to grant new leases, or to renew existing leases, of buildings with a "substandard" (F or G) energy performance rating (also known as an asset rating), as shown on an Energy Performance Certificate ("EPC"). From 1 April 2023, it will also be unlawful for landlords to "continue to let" premises with a substandard asset rating. For this purpose, it is only leases that are relevant; lesser interests, such as tenancies at will and licences to occupy do not trigger MEES. Similarly, long leases (of 99 years or more from the date of grant) and short leases (of up to 6 months from the date of grant) are also outside the scope of MEES (although there are anti-avoidance provisions to prevent landlords from just granting a series of 6 month leases).
It is the government's stated intention that the threshold for MEES compliance will increase over time with the current proposal being a compulsory B rating by 2030. As the technical standards against which EPCs are prepared are becoming stricter as well, landlords are effectively forced to keep looking at their portfolio and improving buildings in order to avoid their obsolescence and (perhaps more importantly) the risk of fines and reputational harm for breaching the legislation.
The fines for letting (or, from 1 April 2023, continuing to let) sub-standard premises in breach of MEES can be up to £150,000 per breach, so landlords should be taking MEES seriously. It is enforced at a local level by the Trading Standards office at the local council.
3. The EPC B 2030 Requirement
The government's new proposal (as at March 2021), in response to the 2019 Consultation outlined above, is to require all non-domestic rented properties to meet a minimum EPC B rating by 2030, where it is cost effective to do so. The government estimates that this requirement will bring up to 85% of rented non-domestic buildings into scope of the MEES Regulations. The responses received from the 2019 consultation were overwhelmingly positive with 91% of responses supporting the EPC B target and 86% of responses supporting 2030 as the date for the EPC B requirement to come into force.
The current proposal also has an EPC C rating by 2027 set as an interim milestone and the introduction of two-year ‘compliance windows’. The ‘compliance window’ will begin with the requirement for landlords to present a valid EPC. For EPC C, the government proposes that the compliance window should be 2025 - 2027, and for EPC B it will be 2028 - 2030. This is a crucial change of approach, as until now landlords have not been required to present a valid EPC to be checked, and it has been left to the enforcement authorities to identify for themselves the properties to which MEES applies and the current EPC rating. In practice, this will mean submitting current EPCs to an online register, which will then identify to the enforcement authorities which landlords need to make necessary energy improvements or register a valid exemption. So, from 2025, landlords should start considering and implementing steps to ensure their properties will be compliant with the upcoming MEES requirements that will be enforced from 1 April 2027 and so on.
A summary of the timeline of events and enforcement points up until 2030 are:
(a) from now until 30 March 2023: properties let with an EPC below E and no valid exemption are subject to enforcement risk (no change to the current regime);
(b) 1 April 2023 to 30 March 2025: properties continuing to be let with an EPC below E and no valid exemption are subject to enforcement risk (no change to the current regime));
(c) By 1 April 2025: all rented properties to be registered and have a valid EPC (this effectively increases risk of enforcement under (b));
(d) From 1 April 2027: all rented properties to meet a minimum of EPC C or have a valid exemption registered;
(e) By 1 April 2028: EPCs to be checked (renewed if possible) for rented properties – this identifies properties which will need further improvements; and
(f) From 1 April 2030: all rented properties to meet a minimum of EPC B or have a valid exemption registered.
3.1 Proposals to Strengthen Enforcement
The 2019 Consultation and March 2021 Consultation both discussed how the current enforcement mechanisms could be strengthened. In summary the relevant enforcement proposals are:
(a) Requiring that landlords provide a valid EPC to letting agents prior to a property being put on the market and removal of the seven to 21 day exemptions meaning there would be no circumstances in which a property could be marketed or let without a valid EPC.
(b) Requiring letting agents and online property platforms to refuse to market properties for let without a valid (and compliant) EPC. Legislation placing requirements on letting agents is currently in place, however the legal position on online property platforms is less clear. The government proposes to seek primary powers to place a requirement on letting agents and online property platforms to only advertise and let properties compliant with the MEES Regulations.
(c) The continual requirement to have an EPC if letting. Currently, once an EPC expires after 10 years, a new, valid EPC is only required when the property is re-let, not when a tenancy is renewed or extended with the same tenant in situ throughout. As a valid EPC is a legal requirement to bring properties into scope of the MEES Regulations, these types of properties (where the EPC has expired and the tenancy is renewed or a tenant is in situ throughout) are not covered by the MEES Regulations. This measure will therefore make sure that lease renewals are captured within the scope of the MEES Regulations, by ensuring that properties always have an up-to-date EPC during the whole time that they are being rented out.
(d) Post-improvement EPCs to demonstrate compliance with MEES. By mandating post-improvement EPCs, the EPC rating of a building will be kept up to date after any changes to the property that affect energy efficiency, and it will be easier for local authorities to check and enforce compliance.
(e) Permitting local authorities to use EPC Open Data for MEES enforcement.
4. What are the issues for landlords?
Apart from the risk of fines (and reputational harm) for breach, there are a number of legal and practical concerns. High at the top of the list is the risk that premises become unlettable without significant capital expenditure, which of course is the most obvious consequence of MEES. However, MEES has a number of other implications, particularly in landlord/tenant relationships.
For a start, it has made dilapidations claims more complex on lease expiry, as tenants could now argue that they don't have to remedy disrepair, or reinstate alterations they have made, because of the works the landlord will have to undertake to improve the EPC rating before reletting the space. There might also be arguments made on open market rent reviews that the market rent should be discounted, or even reduced to nil, if the hypothetical letting would be in breach of MEES (although counter-arguments can be made too).
MEES is also now an important consideration when tenants apply for consent to undertake works, as landlords will want to consider carefully the effect of those works on the energy efficiency of the space. It is not clear whether or not, in the absence of a specific prohibition in the lease, a landlord can reasonably refuse consent to a tenant's proposed alterations simply because of the effect they would have on energy efficiency. Landlords will also want generally to control, or even prevent, tenants from obtaining their own EPCs, in case they are undertaken based on assumptions that result in a poorer asset rating than might be the case if the landlord undertook them.
Further issues arise specifically in relation to buildings rented in a ‘shell and core’ state. Non-domestic buildings are often rented in a shell and core state. To be compliant at the point of let, which is the current obligation, landlords either have to install measures that will be immediately replaced, or tenants will have to pay for installations before they legally become the tenant. Under the new proposal, MEES could cease to be enforceable at the point of letting and instead landlords and tenants will have 6 months after the lease is granted in which to make any necessary improvements, meaning that tenants should expect going forward to be required to fit out in a way that ensures MEES compliance. The government is also considering passing on some of the responsibility for compliance with MEES to tenants, which will require new primary legislation.
Tenants are increasingly alert to MEES when looking to take new space. A lease granted in breach of MEES is not invalidated, and the risk of a fine currently sits squarely with the landlord, so there is limited initial risk for a tenant, but a tenant will have to comply with MEES itself if it wishes to sublet, as it would then be a landlord, and so will be concerned that there is not a practical fetter on its ability to sublet space that it no longer needs. For the same reason, tenants may be concerned that it is harder to assign leases of substandard premises, as the assignee may consider itself less able to sublet.
As we approach 1 April 2023, and now beyond as the minimum standard increases to C and then to B, landlords are going to need to start seeking consent from their tenants to enter substandard premises to carry out works. This could mean disruption for tenants whose leases do not allow them to refuse consent, which could be detrimental to their business (and therefore their relationship with their landlord). The same could already be an issue where tenants wish to renew leases of substandard premises both before and after 1 April 2023.
Finally, purchasers of commercial properties are now reducing the prices that they are willing to pay once they discover that they are substandard, in order to take account of the future capital expenditure that will be necessary to bring them up to standard before 1 April 2023 and also the effect of a much higher EPC rating of B by 2030.
5. Validity of EPCS
MEES cannot apply to a property unless it has a valid EPC with a substandard asset rating. The law on EPCs is set out in the Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2012 (the "EPC Regulations"). EPCs have a "life" of 10 years, after which they will cease to be valid. Unless they are replaced, either before or after the 10 years ends, the property will then have no EPC, and so (regardless of its energy (in)efficiency), MEES will not apply. Note that the asset rating on an EPC cannot change over time; the only way that works will have an effect on an asset rating is if a new EPC is prepared, rendering the previous one invalid.
Most properties are required to have an EPC on the grant of new leases, which arguably includes lease renewals (although the government's guidance on EPCs suggests otherwise) and also on sale. New EPCs also have to be obtained following completion of certain types of works, in order to comply with the Building Regulations 2010, and a tenant would have to obtain an EPC if it wished to assign or sublet and an existing valid EPC were not available. If an EPC has expired, a new one should have been obtained if any of those triggers had since occurred, and could have been obtained voluntarily as well, so it is important for landlords to keep track of the activity at their buildings and ensure they know which EPC is current.
It is, of course, possible for the landlord or the tenant to obtain a new EPC at any time, even if the existing one remains valid, and doing so would invalidate the existing one. All EPCs have to be registered, so it is always sensible to check the publicly available "EPC Register" (https://www.ndepcregister.com/) to ensure you are looking at the most recent EPC for the property. Under the new March 2021 consultation and proposals, the government are proposing to expand the use of this register. The PRS Exemptions Register currently only contains data on properties that have applied for an exemption. It does not capture all properties that should be in scope of the MEES Regulations. Under the new proposal, each let property would have to be registered on the database with a valid EPC and would need to evidence a relevant exemption (as is the current requirement) if it is substandard. The database would be operated by a third-party that will provide scrutiny and a decision for the exemptions, as well as guidance on compliance and exemptions. Having a third-party operator will remove the additional pressure on local authorities to audit exemptions and ensure a consistent experience for landlords. Landlords will need to provide a copy of a valid EPC for inclusion in the database demonstrating compliance with the MEES Regulations.
Not every building has to have an EPC when it is sold or let. Places of worship, temporary buildings (which will be used for 2 years or less) and industrial or agricultural buildings with a low energy demand, for instance, are excluded from the requirement to have an EPC, and so may not have an EPC. If they do not have an EPC, they will be outside the scope of MEES. Similarly, an EPC is not needed if the space is not (part of) a "building" as defined in the EPC Regulations; this means it must have a roof and walls, and use energy to condition its internal climate. Car parks, for instance, are often not "buildings" for this purpose (although an office within a car park building could be). Small kiosks and cash machines could be "buildings" if they are part of a wider building, but if they are truly stand-alone then, as long as they have a total useful floor area of less than 50m2, an EPC won't be needed to sell or let them.
There is debate over whether or not MEES applies if the valid EPC was obtained voluntarily, when one was not required (whether because there was no transaction triggering the obligation to obtain one, or because the property did not need one). The position under the MEES Regulations is unclear, and so the cautious approach is to assume that a voluntarily obtained EPC will still trigger MEES obligations if it shows a substandard rating. The government's guidance on MEES suggests that a voluntary EPC will not trigger MEES, but it is difficult to know how the enforcement authorities will be able to tell whether or not the EPC was obtained voluntarily, and the guidance does not have legal effect anyway, so in practice the cautious approach may be wise.
6. Listed Buildings
There is currently no simple, or easy to understand, answer to the question of whether or not an EPC is needed for listed buildings. There is an exclusion in the EPC Regulations for "buildings officially protected as part of a designated environment or because of their special architectural or historical merit, in so far as compliance with certain minimum energy performance requirements would unacceptably alter the character or appearance". This cannot simply mean that all listed buildings are exempt from the need of an EPC, that would give effect to the "in so far as" element. The starting point must, therefore, be that listed buildings are just as capable of needing an EPC when they are sold or let (or altered) as any other building. However, it must also mean that there are circumstances in which some buildings (not just listed buildings, but possibly also buildings in conservation areas or indeed buildings that are just "heritage" in some way) do not need an EPC when they are sold or let.
Unfortunately, neither the EPC Regulations nor the government's guidance on EPCs really sheds any further light on what this exclusion actually means or how it is to be applied in practice. There is no explanation of what the "certain minimum energy performance requirements" are, who decides what changes to "the character or appearance" of a building are "unacceptable", or how that decision is made.
In the absence of any clarity, for the purposes of MEES, the approach needs to be a pragmatic one. That probably means, in practice, assuming that an EPC is needed (unless it is clear that the exclusion applies). Further, the 2019 consultation raised issues that the Simplified Building Energy Model (SBEM), used to assess non-domestic EPC ratings, is not as effective at assessing older properties. This is because recommendations can be tailored towards modern construction techniques which may be inappropriate and could have negative impacts on the building fabric. In response to the outcomes of the 2019 consultation and ambiguity in respect of listed buildings, the government's March 2021 proposal is to require all listed buildings, and all buildings located in conservation areas, which are to be rented out, to have an EPC. Under this proposal, protected buildings that are privately rented may still be able to register for relevant exemptions under the MEES Regulations if they are unable to comply with the minimum energy efficiency standards. If this proposal is implemented, it will remove the exception for listed buildings and buildings in conversation areas and the exemptions below will have to be relied upon in any case.
7. What Energy Efficiency improvements have to be made?
The MEES Regulations do not positively require any works to be done; they simply prevent landlords from granting leases, or continuing to let, if the premises are substandard and no exclusion or exemption is available.
However, in reality landlords will have to make energy efficiency improvements in order to bring their properties up to standard, and several of the exemptions and exclusions under the MEES Regulations refer to "relevant energy efficiency improvements".
To be a "relevant energy efficiency improvement", an improvement must be one that is included in Table 6 of Building Regulations Approved Document L2B and then recommended for that specific property either in the recommendation report accompanying an EPC, or a surveyor's report.
It must also satisfy the "seven year payback rule"; this means that it must achieve a simple payback of seven years or less, i.e. the savings in utilities bills over seven years from the date on which the installation of the improvement is completed must be equal to or exceed the cost of paying for the improvement over the same seven year period. Whilst that sounds straightforward, the MEES Regulations contain rather complex formulae for making the calculation. Indeed the implementation of the seven-year payback test was criticised and forms part of the current consultation published on 17 March 2021. The March 2021 consultation proposes the introduction of a calculator that will provide standardised purchase and installation costs of energy efficiency measures, based on actual industry data. Landlords will be able to input their building characteristics from which they would then receive a list of measures that are in scope or out of scope of PRS for their building based on pre-populated cost and payback assumptions. This will make it easier for Landlords to work out what EPC improvements need to be made and whether the 7 year pay back rules applies.
8. What are the exemptions and how can landlords rely on them?
An exemption cannot be relied upon unless it has been registered online. Registration is undertaken on a self-certification basis by the landlord or its agent, via https://prsregister.beis.gov.uk/NdsBeisUi/register-search-exemptions (the "PRS Exemptions Register"). The available exemptions for commercial properties, which can be registered, are:
- the "Seven Year Payback" exemption;
- the "All Improvements Made" exemption;
- the "Wall Insulation" exemption;
- the "Consent" exemption;
- the "Devaluation" exemption; and
- the "New Landlord" exemption.
The government published brief guidance on the registration requirements in May 2018, which explains what needs to be submitted with applications for registration of exemptions. Whilst there are specific requirements for each exemption, in every case the landlord applying for registration will need to include the address of the property, identify which exemption they wish to rely upon, and submit a copy of the current valid EPC for the property.
It is important to note that the benefit of an exemption is personal to the landlord who registered it. A purchaser cannot rely on an exemption registered by the seller, until he has subsequently registered it for himself, and a landlord cannot rely on an exemption registered by his tenant (who may also be a landlord as a result of subletting), and vice versa.
Following the ‘exemption window’ proposal outlined above, although some exemptions are valid for 5 years, to encourage continual energy efficiency improvements the government is proposing that all properties must review their existing exemptions at the start of each compliance window. In practice, without this, a landlord registering for an exemption in 2025 would not have to review that exemption until 2030, by which time both compliance window periods would have passed.
8.1 The "Seven Year Payback" Exemption
Strictly, this is not an exemption at all but energy efficiency improvements that do not meet the seven year payback rule (described above) will not be "relevant energy efficiency improvements" for the purposes of MEES. If these are the works required to bring a property up to standard, then the landlord will not need to do them.
The MEES Regulations do not, therefore, require this "exemption" to be registered before it can be relied upon. However, it can be registered on the PRS Exemptions Register, and the government guidance suggests that it should be, so best practice will be to register it anyway.
When registering landlords should include copies of three quotes for the relevant works from qualified installers, confirmation that the landlord is satisfied that the works do not meet the seven year payback rule, and a copy of the cost calculations made to demonstrate this. There are concerns that the requirement could create a market for quotes, where the sole purpose of that quote would be to prove that it should not materialise into actual works and could lead to cases where it is difficult to obtain a quote or suppliers have charged to provide one, as they suspect the quote will mean no works are required. The 2019 consultation responses also raised that that the requirement to obtain three quotes was overly burdensome for both the landlord and market suppliers, which the government agreed with. The government is considering simplifying the exemption process by providing clearer guidance and introducing a "calculator", applying a set of standardised costs for measures, so that landlords can avoid the need to obtain multiple quotes. Where the calculator does not reflect the reality of a particular situation, however, the government proposes that the process of using three quotes can still be followed instead.
This can only be relied upon for five years, at which point the landlord must obtain new quotes and check the calculations again to see if the seven year payback rule is still not met.
It does not exempt the landlord from carrying out works that do meet the seven year payback rule, though, only those that do not; so it is not an excuse for doing nothing at all!
8.2 The "All Improvements Made" Exemption
If a landlord has made all the "relevant energy efficiency improvements" for his property and the asset rating (on a new EPC) is still substandard, or there are simply no relevant energy efficiency improvements that can be made, then the landlord can claim an exemption from MEES for five years from the date of registration on the PRS Exemptions Register.
If the landlord is simply relying on the recommended energy efficiency improvements in the EPC or its recommendation report, nothing more needs to be included with its application to register this exemption. However, if the landlord has a surveyor's report that recommended relevant energy efficiency improvements for the property, all of which have been made (or advising that there are none), a copy of that report must be included in the registration.
8.3 The "Wall Insulation" Exemption
Again, this is not strictly an exemption. An energy efficiency improvement is not "relevant" for the purposes of MEES if:
- an independent architect, chartered engineer, chartered building surveyor or chartered architectural technologist, who is registered on any of the RICS Building Conservation Accreditation register, the Architect Accredited in Building Conservation register, the ICE and ISE Conservation Accreditation Register for Engineers, and the CIAT Directory of Architectural Technologists; or
- an independent installer of the improvement in question, who meets the relevant installer standards
advises in a written opinion that the improvement is inappropriate because of its potentially negative impact on the fabric or structure of the property, or building of which the property forms part. This is generally known as the "wall insulation" exemption, as it is difficult to envisage any other improvements that might have this effect!
A landlord wishing to rely on this must register it on the PRS Exemptions Register and include a copy of the written opinion. Once registered, it lasts for five years, after which time the landlord will need to obtain a new opinion (if it wishes to rely on the same exemption again) and register the new exemption.
This only applies to the energy efficiency improvements specifically in question, however; if there are other relevant energy efficiency improvements, the landlord must still make those improvements, or claim a separate exemption for them.
8.4 The "Consent" Exemption
This is the exemption that is likely to be most heavily relied upon by landlords. There are two tests, depending on the person from whom consent is required:
- If consent is required from a tenant, the landlord can claim an exemption from MEES if the tenant has refused consent to the relevant energy efficiency improvement, regardless of how limited the landlord's efforts to obtain consent might have been. But the landlord cannot claim an exemption if the tenant grants consent subject to conditions, however unreasonable.
- If consent is required from anyone other than a tenant, the landlord must have made reasonable efforts to obtain it, and the exemption will only be available if the consent is refused or granted subject to conditions with which the landlord cannot reasonably comply.
Apart from a tenant, a landlord may need consent from, for instance, a local planning authority (if the improvement requires planning or listed building consent), a neighbour (for instance, if a party wall award is needed), a mortgagee (under the terms of the landlord's loan secured against the property), a superior landlord (where consent is required under the terms of the landlord's own lease) or a third party (for instance, someone with the benefit of a restrictive covenant over the property that would be breached by the carrying out of the energy efficiency improvement).
To register this exemption, the landlord must include copies of relevant correspondence and documents showing that consent was needed, sought, and not obtained (or given subject to a condition with which the landlord could not reasonably comply).
This exemption lasts for five years, except where the landlord is relying on a tenant's refusal of consent, in which case it will cease to apply if the tenant leaves the property within the five years. If that happens, the landlord will either have vacant space (and therefore no tenant from whom consent is required) or an assignee or continuing undertenant from whom he must seek consent instead.
This exemption only applies to the energy efficiency improvements for which consent is refused (or given subject to unreasonable conditions). If consent is given, or not needed, for other relevant energy efficiency improvements, they must still be made.
8.5 The "Devaluation" Exemption
An exemption is available if, in the preceding five years, the landlord has obtained a report from an independent surveyor, stating that making the relevant energy efficiency improvements would reduce the market value of the property (or the building of which it forms part) by more than 5%.
When registering this exemption, the landlord must include a copy of the report he is relying upon. The exemption lasts for five years and, like other exemptions, it only applies to the specific energy efficiency improvements to which the report relates; if there are other relevant energy efficiency improvements, the landlord must still make those improvements, or claim a separate exemption for them.
8.6 The "New Landlord" Exemption
Unlike the other exemptions, this applies for only six months, rather than five years. It is also possible to qualify for this exemption in a number of different ways:
- by granting a lease in accordance with a contractual obligation to do so (the so-called "Agreement for Lease" exemption);
- where the landlord is the guarantor of an insolvent tenant and has taken a lease of the premises in accordance with obligations in its guarantee;
- where the landlord is a guarantor or former tenant who takes an overriding lease under s19 of the Landlord and Tenant (Covenants) Act 1995;
- where a new lease is deemed to have been created by operation of law;
- where a new lease is granted under Part 2 of the Landlord and Tenant Act 1954 (note that a lease renewal completed by negotiation is not granted under Part 2, and so this element of the exemption may actually be of very limited relevance);
- where a new lease is granted by court order, other than under Part 2 of the Landlord and Tenant Act 1954; and
- from 1 April 2023, where the landlord purchases a property that is let on an existing tenancy (and so is "continuing to let" the moment after completion of the purchase).
In each case, to rely on the exemption, the landlord must register it on the PRS Exemptions Register. It appears to be possible to register the exemption before the relevant event occurs, which avoids the risk of the landlord being in technical breach until the exemption is registered, but the PRS Exemptions Register treats the 6 months as starting from the date of registration, so registering too early could result in the landlord having less time than they should. The landlord must include with their registration the date on which they became the landlord and a narrative explanation of the circumstances that result in an exemption being available.
The government's guidance on the registration of exemptions suggests that the Agreement for Lease exemption was only intended to apply to situations in which the obligation to grant the lease was contingent. However, there is no further explanation in the guidance of what that means, and it is not consistent with the strict wording of the MEES Regulations, so it is not entirely clear what weight will be given to it in practice. In any event, most landlords are wary of the Agreement for Lease exemption, as relying on it is not without risk.
As this exemption only lasts for 6 months, it should be seen by landlords as an opportunity either to do works or to prepare the evidence needed to register a five year exemption. Landlords should definitely not be seeking to rely on this exemption alone.
9. What should landlords be doing?
If you are a landlord, then there is plenty to be getting on with, particularly now the government seems intent on raising the minimum required EPC ratings. For a start, dust down all your existing EPCs and work out which properties might be "substandard". Don't just look at which ones have F and G asset ratings; consider how old an EPC is, and whether changes to the property, or in EPC assessment standards, since it was prepared might mean that (whilst still technically valid) it is no longer reliable. Now might also be the time to review which properties are less than a B rating.
You can't necessarily assume that an EPC showing an F or G asset rating means your property is inefficient, though. Many early EPCs were prepared without the assessor being given full access to relevant information, and so are based on worst-case assumptions that result in a lower asset rating than might in fact be deserved. Improvements might also since have been made that improved the energy efficiency (but without a new EPC being obtained). Carrying out a new assessment with as few assumptions as possible being made, and on the basis of the premises as they then stand, often results in asset ratings increasing substantially. So look critically at the EPCs you have!
Where you don't have a current EPC, check the EPC Register to make sure that someone else, such as your tenant, hasn't obtained one that you didn't know about. If you find one, look critically at it (as above). If you find that there isn't one, consider undertaking energy efficiency assessments to see if your property might be at risk when the current tenant leaves and you want to relet, or (after 1 April 2023) if they get their own EPC for some reason (eg to assign or sublet).
Landlords are also now starting to make plans for energy efficiency improvements across their portfolios particularly with the possible new hikes in the MEES. Premises that are currently vacant are clear opportunities, but buildings with tenants in situ can also be considered as there may be things that can be done without disruption to the tenants that can at least mitigate a future MEES risk. Come 1 April 2023, landlords do not want to suddenly find they have to improve large numbers of buildings all at the same time, so starting early will avoid a last minute panic and the risk of works not being done in time and no exemption being available.
It is also becoming common to see landlords including drafting for MEES in their new leases. The sorts of provisions being used include tighter controls over alterations, clauses controlling when tenants can obtain their own EPCs, and regulating when the landlord can enter the premises to carry out energy efficiency improvement works and who pays for them.
Finally, landlords should also consider having processes in place to ensure that they do not inadvertently breach MEES by, for instance, granting a lease of substandard premises without an exemption in place, and policies for how they will approach lettings of premises such as retail units where, without the tenant's fit-out in place, the asset rating might be F or G.
And finally, any landlord who wants its voice to be heard on the topic should respond to the latest consultation!
10. What should tenants be thinking?
Tenants should also be taking MEES seriously, as it may affect their ability to underlet (or assign, if the assignee thinks it might want to underlet in the future). Their technical due diligence on leasing transactions should therefore include reviewing the EPC and considering whether or not it is accurate, and will be improved (and if so, to what extent) by their fit-out. Tenants should decide whether or not they are, as a matter of policy, willing to take space that is, or is at risk of becoming, substandard, and what (if anything) they or the landlord will do to improve substandard space, over what timescale, and at whose cost.
Care also needs to be taken over the lease to ensure that any provisions included by the landlord to address MEES are fair and balanced, and do not unreasonably seek to transfer excessive risk or cost to the tenant. In particular, tenants should consider whether or not the lease makes it more difficult for them to fit out their space, the circumstances in which the landlord is entitled to enter the premises to carry out works (which may cause some business disruption), and what works can be recharged to the tenant.
Tenants who are already in occupation of substandard space should review their existing leases to check whether or not they might be liable for some, or all, of the landlord's costs of carrying out energy efficiency improvement works to comply with MEES.
And finally, any tenant who wants its voice to be heard on the topic should respond to the latest consultation!
11. For more advice on MEES
Please speak to Simon Keen, a Counsel in our London Real Estate team, or your usual Hogan Lovells contact.
Authored by Simon Keen, Jane Dockeray and Ingrid Stables
