MEES - The Next Ten Years

Posted by NRG Focus on 27th April 2021 -

TEN things you need to know about the minimum energy efficiency standards if you own or occupy commercial property.

1. THE CURRENT POSITION

Since April 2018, the new legal Minimum Energy Efficiency Standards will apply to rented commercial buildings. The new legal standard brings threats and opportunities for landlords, freehold investors, developers, lenders, and pension funds. The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (the PRS Regulations) sets a minimum energy efficiency standard (MEES) of EPC E for private rented properties. This means that it is unlawful for landlords to grant a new tenancy of commercial property with an EPC rating of ‘F’ or ‘G’ (the two lowest grades of energy efficiency). This applies to both new leases and renewals (unless an exemption applies, and the landlord has registered that exemption).

From 1 April 2023, this will be extended to include existing leases making it unlawful for a landlord to continue to let commercial property (unless an exemption applies and is validly registered).

 

What are the exemptions”?

Properties which are let on tenancies of more than 99 years and less than six months are excused.

Buildings which are not required to have an EPC: such as Places of Worship, non-residential agricultural buildings with a low energy demand, certain listed buildings, temporary properties and holidays lets.

Improvements are not cost-effective.

It has been independently verified that improvements may decrease the value of a property by 5% or more, or in some circumstances, damage the property.

 

“The ‘Golden Rule’: where an independent assessor determines that all relevant energy efficiency improvements have been made to the property or that improvements that could be made but have not been made would not pay for themselves through energy savings within seven years.

Third party consent cannot be obtained for the improvements, for example, planning authorities, tenants, lenders etc.

 

Exemptions must be registered with the PRS Exemptions Register

Exemptions last for 5 years (some are as temporary as 6 months) and are personal to the owner of the building. The exemption does not run with the land and so if the building is sold, the new owner must apply to register the exemption and all exemptions must be validly registered in order to be effective. After the exemption expires, landlords will need to reapply with evidence that the exemption continues to apply.

 

2. 2021 – 2030

The Governments “Energy White Paper” released at the end of 2002 confirmed that it intends to make it unlawful to continue to let commercial property with an EPC rating of below B by 2030 and on 17^th March 2021, it issued its proposed framework in a new consultation for private-rented properties. This forms part of its “package of measures’ to reduce carbon emissions as it is estimated that bringing the minimum standard to a B rating will bring around 85% of commercial buildings into scope. The proposed framework sets out a phased implementation with the introduction of compliance windows as follows:

 

First Compliance Window: EPC C (2025-2027)

• 1 April 2025: Landlords of all commercial rented buildings in scope of MEES must present a valid EPC.

• 1 April 2027: All commercial rented buildings must have improved the building to an EPC ≥ C or register a valid exemption.

 

Second Compliance Window: EPC B (2028 – 2030)

• 1 April 2028: Landlords of all commercial rented buildings in scope of MEES must present a valid EPC.

• 1 April 2030: All commercial rented buildings must have improved the building to an EPC ≥ B or register a valid exemption.

 

This may be an incremental pathway, but landlords be aware because at each enforcement in 2027 and 2030, landlords will need to demonstrate that the building has reached the highest EPC band that a cost-effective package of measures can deliver. In addition, the Government intend to introduce the necessity for landlords to present a valid EPC two years before the relevant enforcement date for each EPC target. In essence, this will involve submitting the current EPC to an online PRS compliance and exemptions database. This will trigger a clear time period within which landlords will be expected to undertake improvements if they have not done so already.

 

3. LISTED BUILDINGS?

The requirement of EPCs for listed buildings and properties of historic interest has been an ongoing source of confusion for landlords. The Historic England website tells us that “From January 2013 there has been an ‘exemption’ for listed buildings. However, the exemption is qualified, it states: “Insofar as compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance”.” (EPC Regulation 5). therefore, MEES does not apply to those improvements, the important point is that as an EPC is not legally required for those works, there is no need to register those works on the exemption register. An EPC is required for the other improvements that would not unacceptably alter their character or appearance and therefore MEES does apply to them and, as a consequence, improvements in F & G rated buildings have to be completed or a valid exemption registered.

In its March 2021 consultation, the Government proposes to catch listed buildings and those in conservation areas – which are to be rented out – to have an EPC (unless a valid exemption is registered).

 

4. COST FOR A BREACH OF THE MEES REGS

The lease will still be valid and enforceable if completed in breach of the MEES regulations. The current consequences for breaches of MEES standards include penalties of 10 or 20% of the rateable value of the Property (capped at £50,000 – £150,000), with the possibility of enforcement action by the local authority being taken against unlawful tenancies.

 

5. LANDLORD AND TENANT ISSUES: SHELL AND CORE & STRIPPED BACK LETTINGS

Improving the energy efficiency of our buildings

A guide to energy performance certificates for the construction, sale and let of non-dwellings.

 

“if a building is to be sold or rented out without fixed services, but there is an intention that fixed services will be installed, the EPC should be based on the building's use class under the planning legislation. This applies whether fixed services have ever been installed previously in the building, or whether the building is newly constructed on a ‘shell and core’ basis. For the purposes of producing the EPC, the activity within the building should be specified in line with business activity typical of the use class and the most energy intensive fit-out adopted in line with Part L of the Building Regulations in force when the building was built.

 

A Shell and Core building is a building that has never been occupied since construction, an existing building that has been “Stripped back” after a tenant has vacated is not classed as a Shell and Core property.

 

Since 6^th April 2008 for England and Wales and 30^th September for Northern Ireland, when a new Non-Domestic property is completed and is due to be signed of by Building Control (BCB), there must be a lodged On Construction level 4 EPC in place. A Non-Domestic On Construction EPC can only be produced by a suitably qualified Level 4 or 5 Energy Assessor. The usual process is for an Energy Assessor to produce the BRUKL report at design stage.

 

Issues arise when commercial premises are to be let in a “stripped back state” after a tenant has vacated, where it is only the tenant’s fit out that will increase the EPC rating. However, if a stripped back unit does not meet the minimum standard, the landlord cannot lawfully let, and so almost inevitably transactions will require the additional complexity and cost of conditional agreements for lease.  In its March 2021 consultation, the Government highlighted this as an issue and stated that for a shell and core property, where the compliance deadline has been missed, that a tenant must have occupied the property for a minimum of six months before a local authority can take action against the landlord for failing to meet MEES.

 

Comment – There needs to be an increased contractual requirement for collaboration between landlords and tenants in leases and landlords must ensure that sufficient drafting is included in order to protect themselves contractually, including obtaining a tenant commitment to complete energy efficiency works within a relevant timeframe (if the EPC rating rests on the tenants fit out), and step-in rights to complete the works (at the tenant’s cost) should the tenant fail to do so.  The March 2021 Consultation also addressed a potential amended to the Regulations in order to give tenants of commercial property some duties regarding compliance with MEES, and to add duties of cooperation for both landlord and tenant.

 

6. LANDLORD AND TENANT ISSUES: VALUATION

Owners need to consider the existing ratings of properties that they may be planning to sell in the short to medium term. Even if such properties are MEES compliant now, potential buyers will be conscious of the changes coming down the tracks, and this may have an effect on valuation.

 

HOW CAN WE HELP?

NRG Focus can provide a full compliance service, including:

 

• Advice upon the legislation and its implications for your assets.

 

• Assess current energy efficiency and energy performance risk across your portfolio and for individual assets.

 

• Produce a bespoke Asset Energy Report (AER) for your buildings to implement any necessary energy efficiency improvements, aligned with the building life cycle.

 

• The Asset Energy Report will include fully costed investment grade projects for achieving the minimum standards required.

 

• Provide energy performance reports and ratings for statutory compliance and for marketing purposes.

 

• Utilising Dynamic Simulation Modelling (DSM) for all our EPC’s – Greater accuracy than the standard Government ISBEM software.

 

• All our assessors each have over 10 years’ experience in Mechanical Services and Building Surveying

 

• All our assessors are Level 5 qualified therefore can provide BRUKL reports and On Construction EPC’s