Home / How do the changes to the MEES affect commercial leases?
24th October 2023
Stacey Rees and Faye Astin explore the changes to Minimum Energy Efficiency Standards.
The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (SI 2015/962) (MEES Regulations) require that a minimum energy efficiency standard is to be met before properties can be let.
In April 2023, the MEES Regulations were amended so as to prevent a landlord of a sub-standard property from granting a new lease or continuing to let a sub-standard property, unless the landlord makes energy efficiency improvements to the property to make it no longer sub-standard, or unless the landlord claims an exemption under the MEES Regulations (e.g. if the property is a listed building).
A sub-standard property is a property that has an EPC rating of F or G. However, the MEES Regulations are set to become increasingly stringent, calling for a minimum EPC requirement of band C by 2027, and a minimum EPC requirement of band B by 2030.
Failure to comply with the MEES Regulations does not result in a lease being void, but such failure could result in the landlord having to pay a monetary penalty of up to £150,000 and having their name added to a public register recording those who have breached the MEES Regulations.
The Judgment of the case of Clipper Logistics v Scottish Equitable Plc was handed down on 7th March 2022. Whilst this pre-dates the changes to the MEES Regulations referred to above, the judgment was given with the proposed changes in mind. The case concerned the renewal of a lease that was granted in 2010 (before the MEES Regulations existed) in accordance with the 1954 Act. The landlord wished to impose the following new clauses into the renewal lease:
The majority of the clauses requested by the landlord were refused. Whilst the Judge accepted that the clauses were reasonable given the adverse consequences of an EPC rating below an E, the Judge stated that the clauses could not be justified on the grounds of essential fairness, and that they would unreasonably burden the tenant and unfairly advantage the landlord.
As such, the 1954 Act will not guarantee that clauses relating to environmental efficiency will be incorporated into a renewal lease under the guise of them being ‘reasonable modernisation’ and therefore reasonable to add into the renewal lease.
Further, the Judgment does not give consideration to the changing MEES Regulations / EPC requirements during the term of a lease, so does not give a landlord much protection against the potential penalties for breaching the MEES Regulations. This highlights the importance of landlords giving tenant’s works greater scrutiny when consent is requested.
The MEES Regulations unfortunately raise more questions than it gives answers in the context of rent reviews.
For example, in relation to standard rent review assumptions:
Also, when conducting a post April 2023 rent review, there is scope for tenants to argue for lower rents and landlords to argue for higher rents when considering the impact of the MEES Regulations. For example, if there is a requirement for a tenant to pay for improvements to the property for the purpose of improving environmental performance, this could negatively affect rent review as a potential initial large capital expenditure for this will be less attractive to a hypothetical tenant (therefore reducing the open market rent that the landlord may be able to achieve for the property). But if the lease is silent on energy efficiency improvements and it is therefore implied that the landlord will pay to improve the energy efficiency of the property, this may also negatively affect rent review from the tenant’s perspective as it would be more attractive to a hypothetical tenant (and therefore increasing the potential open market rent achievable).
If you are the landlord or a tenant of a commercial property and you wish to discuss how the MEES Regulations affect you, please contact a member of our Commercial Property team on 0161 832 3434.