The Minimum Energy Efficiency Regulations (“MEES”) already prohibit the letting of commercial buildings with an EPC rating of less than ‘E’ (“a sub-standard property”). On 01 April 2023 the next stage of MEES will come into force requiring that a sub-standard property cannot ‘continue to be let’.

What does this mean?

Subject to some time-limited exemptions, any sub-standard property with a lease in place will be in breach of MEES leaving the owner liable for penalties. Property owners should have plans in place to improve the EPC rating and, to the extent that these cannot be carried out by 01 April, will need to check the exemptions for requiring an EPC or temporary exemptions for MEES: does your building sit within any of these? You may have received a letter from your local authority; London Borough of Highbury & Islington have been writing to all owners of sub-standard properties to alert them to the more stringent legislation coming into force. In one instance, however, the existing EPC was out of date and works had already been done to improve the EPC and the new EPC hadn’t been registered.

Landlords can be fined 20% of the rateable value with a cap of up to GBP 150,000 but the potential damage to reputation and discouraging tenants from either letting or staying on in a building could be more costly.

Asking an expert

To further understand what the legislative changes look like in practice, we put forward the following questions to Jamie Barton, Partner at Winckworth Sherwood LLP:

If we imagine a building that is let, the lease expiry is in 3 years’ time and it’s an EPC F…

• What action do you have to take?
• Is the Landlord liable to be fined?
• Will local authorities have the capacity to work out who needs to be fined?

Jamie confirmed that: “the fact that there is three years left on the lease has no effect – landlords have had five years warning of this date! The landlord would need to carry out improvement works or register an exemption.” MEES applies to all leases granted for a term of more than six months. Reading the lease to understand the liability for completing these works, how the costs are recovered, if at all, and establishing how the tenant fit out might affect building performance are all equally important actions.

He went on to explain that: “the capacity question is a good one. The ‘Local Weights and Measures Authority’ is responsible for enforcement of commercial properties and in practice the enforcement authority is likely to appoint the local Trading Standards officers to enforce. There are various ways in which a local authority can find out whether a lease has been granted:

• It can liaise with HMRC to see whether Stamp Duty Land Tax (SDLT) has been paid
• It can check whether a lease of more than 7 years in length has been registered at the Land Registry – although due to a backlog of applications this can currently take upwards of two years
• It could then cross check this against the EPC register

In practice, will they really have the capacity and resources to do so? They are possibly more likely to enforce via the PRS Exemption register – i.e. to test whether the exemptions are valid and to check whether time limited exemptions are being followed up. This is because the information on that register will be more up to date and easily accessible.”

Following this discussion, we put some further questions to Jamie:

• As a lawyer, if you are instructed on a lease renewal or new letting and you find that the EPC is an ‘F’, what do you have to do?
• Are you obligated not to proceed with completing the documentation?
• Do you have to report the Landlord? What is the process?

Jamie tells us: “a solicitor can proceed with the deal as a failure to comply with MEES does not prevent the granting of a lease or the validity of the lease once granted. A solicitor ought to advise the client on the risk of letting a sub-standard property without claiming an exemption.” Although a solicitor would not be required to report a landlord that breaches MEES, there may be other less sympathetic neighbours, more diligent tenants or competing owners who want to flag that lack of compliance with the local authority.

Another concern is the threat of zombie assets where the cost of works required to improve the building performance are not feasible or affordable (subject to any applicable exemptions)[1]. Alongside the availability of funding this will make the environment very harsh for low-EPC asset-owners to operate in unless they are cash rich.

There appears to be an opportunity for developers, funders and the Government to fill this funding gap. If not, then we will almost certainly see more stranded assets in areas where the estimated rental value (ERV) and valuation doesn’t support the refurbishment works that need to be completed. The other concern is how valuers are pricing in the requirement for these works to take place. Is the capex included or do you factor this in to your ERV and price your yield accordingly? Or is the asset valued at zero to reflect it not complying with current legislation? There could be significant write-downs across portfolios in the UK which will impact business growth and the ability to fund new projects.

What can you do?

ESG consultant Hannah Durden tells us to firstly check your EPC rating and the age of the certificate. EPC ratings last ten years and the carbon factors were made 40+% more stringent in June 2022 which has caught out some building owners who require new EPC’s. These changes favour electric systems over gas-fired systems and in particular incentivise the use of heat pump systems.

Most importantly, look ahead. If you are refurbishing a building now and the design is set to last for more than 10 years (as most should do!), then consider that the MEES legislation will have become more stringent by the end of the decade. Whilst not in legislation yet, our understanding is that by 2027 MEES will be raised to an EPC rating ‘C’ which is likely to become a ‘B’ by 2030. In Chris Skidmore’s recent Mission Zero document, the review calls of action recommending government to “legislate by 2025 for the minimum energy efficiency rating for all non-domestic buildings, both rented and owned, to be EPC B by 2030. [Additionally, to] legislate for all new non-domestic buildings from 2025 to have an EPC B rating.” The MEES legislation only currently applies to rented properties.

How can we help?

Please get in touch so we can help you explore the EPC improvements required for your asset. For those with a Net Zero Carbon target, or if you are considering setting one, we highly recommend our decarbonisation reports which use the CIBSE TM54 methodology to provide an accurate picture of both regulated and unregulated energy use within a building. This report will also provide an indicative NABERS rating and high-level feasibility for solar PV installation.

Jamie Barton at Winckworth Sherwood LLP would also be delighted to take your questions or provide advice on this. You can contact him here: https://wslaw.co.uk/our-people/jamie-barton/

[1] WS: note that there is a seven year payback exemption: if the improvements will not match the saving in energy bills over a seven year period an exemption may be available.