MEES Compliance – Preparing for the Unavoidable

No doubt, if you’re a landlord, property owner, developer or tenant, you will have heard much about the Minimum Energy Efficiency Standards (MEES), which came into force in England and Wales on 1 April 2018.  The introduction of MEES meant that subject to a few exceptions, it became unlawful to let “substandard” domestic and non-domestic properties; “substandard” means those properties with an Energy Performance Certificate (EPC & NDEPC) rating of F or G.

Many landlords may be satisfied if they have achieved an energy efficiency rating of ‘E’ or better for their buildings, knowing they have met the current requirements.  However, landlords and tenants may soon be at risk!

Take Note; Very Soon, The Regulations Will Go Further

The Government now plans to go much further, driven largely by the increasing pressure to achieve their target for the UK to be net-zero by 2050.  The government seeks to lift the minimum energy efficiency standard for non-domestic buildings from a ‘C’ to a ‘B’ rating by 2030.

The Department for Business, Energy and Industrial Strategy published an open consultation paper in March 2021 titled the ‘Non-domestic Private Rented Sector minimum energy efficiency standards: EPC B implementation’, which seeks to obtain views on the government’s proposed framework to implement an improved minimum EPC rating of B by 2030 and improve the compliance and enforcement process as part of the on the Minimum Energy Efficiency Standards (MEES) Regulations in the commercial sector.

The consultation ran until 9 June 2021. However, the Government has yet to publish a response as they are still analysing feedback.  They are proposing that the new regulations take effect from April 2025.

Will It Affect You?

It’s highly likely that it will affect you as either a landlord or tenant. It is estimated that implementing the EPC B target will cover around 85% of the UK’s non-domestic rented stock and help the UK achieve its net-zero carbon emissions target by 2050.

The regulations apply when a new lease is granted to a tenant and when existing leases are renewed unless exemptions apply.

Compliance Window

The government is proposing a new implementation and enforcement framework based on ‘compliance windows’ – the government has proposed the following timeline.

First Compliance Window:  EPC C (2025 – 2027)

• 1 April 2025: Landlords of all non-domestic rented buildings in the scope of MEES must present a valid EPC.
• 1 April 2027: All non-domestic rented buildings must have improved the building to an EPC C or greater or register a valid exemption.

Second Compliance Window: EPC B (2028 – 2030)

• 1 April 2028: Landlords of all non-domestic rented buildings in the scope of MEES must present a valid EPC.
• 1 April 2030: All non-domestic rented buildings must have improved the building to an EPC B or greater or register a valid exemption.

The consultation report stipulates that at each enforcement date in 2027 and 2030, landlords must demonstrate that the building has reached the highest EPC band that a cost-effective package of measures can deliver.

Landlords May Be Exempt When

1. All improvements that could be undertaken are made, but the rating doesn’t improve, or the proposed changes will not achieve payback within seven years.
2. The improvements will devalue the property.
3. Third-party consent is required, which may mean that the Landlord cannot comply.

NB: Such exemptions are valid for five years only and cannot be transferred to new Landlords.  The exemption must be registered on the Government PRS Exemption Register, which will be publicly accessible.

Other exemptions include those properties which are let on tenancies of + 99 years and less than six months.

 What Are the Penalties?

If the Local Authority suspects non-compliance, you may be issued with a compliance notice. You will need to provide specific information within a tight timeframe (min 1 month). If you fail to deliver, details of your non-compliance may be made public. The maximum publication ‘name and shame’ penalty is £5,000 for the following breaches:

• The landlord fails to register their property on the proposed Private Rented Sector (PRS) exemptions and compliance database.
• The landlord fails to present a valid EPC by the required dates set out under the proposed compliance window approach.
• The landlord has registered false or misleading information.
• The landlord failed to provide a post-improvement EPC to demonstrate compliance.

Landlords also remain liable to a maximum fine of up to £150,000 if a property has been let in breach of the PRS regulations.

Tenant Obligations

Tenant fit-out choices are not currently regulated but can significantly impact the EPC rating.  A standard tenant fit-out, which may include the installation of small power, lighting, heat systems, ventilation and air conditioning, will typically comply with an EPC E requirement but may no longer achieve the higher EPC B trajectory.  As such, the tenant’s fit-out may not provide the required EPC, for which the landlord is exposed to fines for failure to achieve.

As a result, the government is considering amending the PRS Regulations to give tenants of non-domestic properties some duties regarding compliance with MEES and to introduce mutual cooperation between the landlord and tenant to ensure compliance.

The government only proposes to enforce MEES once a unit is fully operational and occupied for a minimum of six months.  The aim is to help resolve issues created when enforcement is at the point of letting where buildings are rented in a ‘shell and core’ state and therefore is unlikely to achieve an EPC ‘B’ rating.

The Clock Is Ticking; Think It Through and Protect Yourself

1. With the proposed move to band C in 2027, it would be prudent to aim higher for any development or fit-out to mitigate the future risk of non-compliance.
2. Tenants subletting premises may trigger a Landlord’s obligation to improve the EPC rating depending on the terms of the lease covenants.
3. Property owners should consider introducing provisions in leases preventing tenants from carrying out alterations that adversely affect energy performance.
4. Restrict your tenant’s ability to commission their EPC, as these may invalidate existing certificates.
5. Standard lease terms do not force tenants to improve properties at lease expiry. Furthermore, leases signed before 1 April 2018, extending beyond April 2023, are unlikely to have an appropriate covenant to enforce improvements which would mitigate the risk of a fine.
6. A timetable for completing works will delay a lease from completing.  Landlords should consider undertaking works ahead of achieving a letting.
7. There is a real risk that exiting EPC ratings will be challenged if they are found to be incorrect. Especially if this affects the tenant’s business should changes be required.
8. There is a serious threat to reducing property values for those failing to meet required standards.  This, in turn, will impact lenders, due to diminished equity values.
9. Consider adopting a green lease. Based on standard terms, a green lease also includes additional clauses that provide for the management and improvement of the environmental performance of the building. Naturally, the specifics will be determined by what suits individual properties best.

How Can We Help?

We aim to work closely with our clients to ensure they implement the most appropriate and cost-effective compliance route.  If you’d like to discuss your circumstances in more detail, please do not hesitate to get in touch.