How do the changes to the MEES affect commercial leases?

Stacey Rees and Faye Astin explore the changes to Minimum Energy Efficiency Standards.

What is the minimum energy efficiency standard and how has it changed recently?

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.

Penalties

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.

MEES Regulations and the Landlord and Tenant Act 1954 (“1954 Act”)

 The Judgment of the case of Clipper Logistics v Scottish Equitable Plc was handed down on 7^th 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:

1. to prohibit the tenant from carrying out alterations or additions which would cause the property to have an EPC rating below band E;
2. to require the tenant to indemnify the landlord for the cost of obtaining a new EPC if they were to make any alterations which invalidated or adversely affected the EPC rating; and
3. to oblige the tenant to maintain the current EPC rating throughout the term and return the premises to the landlord with the current EPC rating.

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.

MEES Regulations and rent review provisions

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:

• It will usually be assumed that the landlord and tenant have complied with their obligations under the lease, but what if the lease is silent in respect of the parties obligations to comply with the MEES Regulations? There is still statutory duty on the landlord to keep the property at an EPC rating of E or above;
• It will usually be assumed that the property is available to let in the open market by a willing landlord to a willing tenant, but what if the property is sub-standard / has an EPC rating of E or lower? That would undoubtedly mean that a willing tenant is not likely to let the property. And who would pay for the repairs needed to bring the property up to standard again at the end of the term to allow the landlord to re-let the property?

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.