MEES for commercial lettings – the same but different?

Bill Chandler, Legal Director, Hill Dickinson LLP, takes a look at the recent changes in the Minimum Energy Efficiency Standard which impacts EPC rating standards on commercial property and how this is likely to affect commercial landlords.

Related topics:  Landlords,  EPC,  Energy Efficiency,  Commercial,  MEES
Bill Chandler | Hill Dickinson LLP
5th April 2023
Bill Chandler 064
"This final act in the initial MEES roll-out means that, from 1 April 2023, all new and existing lettings – residential or commercial – are now subject to the MEES regime. But the required standard remains at ‘E’ … for now"

The Minimum Energy Efficiency Standard (MEES) is changing – what does this mean for landlords of commercial or mixed-use properties?

Improving the energy efficiency of our existing building stock is an integral part of the government’s net-zero strategy. The final stage of the initial roll-out of the Minimum Energy Efficiency Standard (MEES) took place on 1 April 2023, with the next key date expected to arrive in 2 years’ time.

Landlords need to ensure they are complying with current requirements while keeping an eye on what comes next. Landlords of commercial or mixed-use properties also need to be aware that the rules for commercial lettings are different from those affecting residential lettings.

MEES – season one

Since MEES took effect in 2018, it has been unlawful for landlords to grant a new lease of substandard premises, unless an exemption applies. Premises are ‘substandard’ if they have an Energy Performance Certificate (EPC) with a rating lower than ‘E’ – although the minimum standard is going to be increased (see below).

Although the 2018 scheme applies to both residential and commercial lettings, the schemes are not identical. For example, substandard commercial premises qualify for an exemption if the required works to bring the property up to scratch would not pay for themselves within seven years out of estimated savings in energy bills. For domestic premises, on the other hand, the equivalent exemption involves a spending cap of £3,500 rather than focusing on payback periods.

The other major exemptions (including the inability to obtain a required third-party consent, or that the required works would devalue the property by more than 5%) are however common to residential and commercial property.

The penalties are also significantly higher for commercial property, with a maximum penalty of £150,000.

Season finale – 1 April 2023

The initial MEES regulations provided for the scheme to progress beyond new lettings and eventually capture existing lettings, including those granted before 2018. So, since 2020 it has been unlawful to continue to rent out substandard domestic premises.

And since 1 April 2023, it is now unlawful to continue to rent out substandard non-domestic premises. This brings subsisting commercial leases within scope, even if they were perfectly lawful when granted. Landlords should by now have either improved any substandard rented commercial properties to an EPC rating of ‘E’ or above or else registered an appropriate exemption.

This final act in the initial MEES roll-out means that, from 1 April 2023, all new and existing lettings – residential or commercial – are now subject to the MEES regime. But the required standard remains at ‘E’ … for now.

Season two – coming soon!

Setting the compliance bar at ‘E’ meant that the initial MEES scheme only affected a minority of rented residential and commercial properties. This would never achieve the required outcomes in terms of driving up the energy efficiency of our existing building stock.

No sooner had MEES been implemented than the government started consulting on where it should go next. And the answer is likely to be different for commercial properties than for residential.

A consultation for residential MEES that ran from September 2020 to January 2021 proposed increasing the minimum standard for residential premises from ‘E’ to ‘C’, with the increased standard applying to new lettings from 1 April 2025 and to all lettings from 1 April 2028. Other proposed changes include increasing the spending cap to £10,000, on a ‘fabric first’ basis.

For commercial premises, the government wants to increase the minimum standard to ‘B’. A consultation for non-domestic MEES that ran from March to June 2021 proposed a single stepping stone of ‘C’ from 1 April 2027, ahead of the jump to ‘B’ on 1 April 2030.

Each increase will be preceded by a two-year ‘compliance window’, with compulsory EPCs for all rented commercial property. If the EPC presented at the start of the compliance window does not meet the increased standard, the landlord will have two years to improve the property, register a new exemption or revisit any existing exemption.

Despite the length of time since the consultations closed, we still await confirmation of the next steps - and, significantly, the necessary legislation to enact them.

The government’s ‘Powering up Britain’ plan launched on 30 March 2023 reaffirms the government’s commitment to ‘improving energy efficiency performance across different buildings’ and discusses the recently-established Energy Efficiency Taskforce and numerous other energy efficiency initiatives around insulation, heat pumps, the social rental sector and owner-occupied buildings.

The new plan also promises a response to the MEES consultations ‘in due course’, but without committing to any specific timetable.

However, 1 April 2025 will come around quickly, so in the meantime, landlords are probably best advised to make plans on the assumption that the MEES consultations will be implemented largely (if not exactly) as proposed.

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