The MEES Regulation sets the minimum EPC rating for residential lettings. It will extend to all commercial properties from 2023 and is one of the UK Government’s primary tools to achieve net zero carbon emissions by 2050 – the target which garnered substantial media attention on ‘Earth Day’, 22 April 2021. This article discusses the UK Government’s recent proposals to increase the MEES Regulation at a faster rate, and the associated costs to landlords and tenants, which cannot be ignored.
On 17 March 2021, the Government began a consultation to strengthen the current body of environmental regulation, which comprises:
- Energy Performance of Buildings Regulations (2015/962) which requires EPCs to be made available to buyers and tenants.
- Building Regulations 2010 (2010/2214) which requires all buildings (commercial and residential) to comply with the energy performance standards when being newly built or renovated.
- The MEES Regulation which makes it unlawful for landlords to let properties which have an EPC rating below a specified minimum rating. The MEES Regulation key dates are:
1 April 2020 – the minimum rating applied to all residential landlords. There are financial penalties for non-compliance, and any tenancy granted in breach (without an exemption) will be unlawful. A residential landlord’s ability to serve a section 21 eviction notice may be restricted.
1 April 2023 – the minimum rating extends to all commercial properties. A commercial lease granted in breach of the minimum rating will be unlawful, and the landlord will face financial penalties linked to the property’s rateable value.
The minimum EPC rating is currently grade ‘E’. It was envisaged this would not be increased until 2030, however the Government’s consultation proposes:
- to bring forward the date of increase of the minimum rating to 2027, to grade ‘C’
- a further increase of the minimum rating to grade ‘B’ in 2030.
- to place an additional obligation on landlords to submit their own EPC to a central register, within a 2-year compliance window
- to require landlords to renew their EPC automatically every 10 years
The consultation closes on 9 June 2021 – it anticipates market-wide support for its proposals. The Government will publish their response in late 2021, and any changes will come into force on 1 April 2025.
If the proposals are implemented, commercial landlords will have less time to invest in environmental technologies, and if a central register is implemented, there are likely to be additional costs.
The question is – can landlords share the environmental costs with tenants? Ideally, cost sharing should be negotiated and agreed before a new lease is entered; some reasons are:
- Environmental lease terms are unlikely to be accepted as a “modernisation” in statutory lease renewals. Limited guidance is available, but a recent county court case (WH Smith Retail Holdings v Commerz Real Investmentgesellschaft mbH, 25 March 2021) suggests it will be difficult for landlords to impose EPC payment obligations on tenants. Although this county court case is not binding, it is nevertheless indicative.
- Most leases require a tenant to give ‘vacant possession’ to break a commercial lease. If a tenant has installed equipment to achieve the requisite EPC rating, they might need to remove this equipment. If so, subsequent new lettings might become unlawful, and the landlord’s ability to re-let will be restricted. Lease terms should be carefully considered– i.e., can the landlord object to a break right on this basis?
Bishop & Sewell have a team of expert commercial property solicitors, providing advice to many commercial landlords in different sectors. Please get in touch if you are considering MEES Regulation compliance, or any the following questions:
- Can I share the cost of ongoing environmental compliance with my tenant?
- Can I structure a lease agreement conditional upon my premises attaining the MEES Regulation minimum rating?
- Can I incorporate terms to incentivise a tenant to commence EPC works when fitting out?
- How can I restrict a tenant from carrying out works which alter the EPC rating?
- How should I structure break options or yielding up provisions to protect the EPC rating?
- Will marketability be affected if tenants are unable to assign or underlet by reason of non-compliance with the MEES Regulation?
If you would like to discuss any of the points raised in this article, please do get in contact. Christopher Simpson is a Solicitor in our Commercial Property team. Should you require any further advice or assistance, please contact us at commprop@bishopandsewell.co.uk
The above is accurate as at 23 April 2021. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case by case basis.
