The stated aim of the legislation is to achieve a minimum efficiency rating for all properties throughout England and Wales and, given the government estimates that around 18% of commercial properties hold the lowest EPC ratings of F or G, this legislation will have far reaching consequences for both landlords and tenants.
Is your property affected?
MEES will only apply to buildings that require an EPC in the first place (for example, listed buildings will not be impacted). Additionally, MEES will not apply to very short lettings (less than 6 months) or lettings of 99 years or more.
Additionally, there are certain exemptions available and, if the relevant property comes under one of the exemptions, MEES will not apply. The exemptions include properties where all cost effective improvements (i.e. works which will pay for themselves over seven years) have already been carried out or no such works can be undertaken, and instances where the landlord is unable to obtain any third party consents that are required for the works (for example, from a superior landlord, lender, tenant or local planning authority). However, the latter exemption will only last for five years, after which time the consents should be applied for again.
Trading Standards will be dealing with enforcement of the MEES legislation and civil penalties will be imposed for non-compliance based on the rateable value of the property up to a maximum fine of £150,000.
What do you need to do?
Landlords should be reviewing their portfolios and seeking to make energy efficiency improvements wherever possible. Commercial leases are now commonly being drafted to include "green lease" provisions to deal with the responsibilities stemming from the MEES regulations and other environmental initiatives. Recent examples we have seen include prohibitions on tenants carrying out alterations that adversely affect the environmental performance of the property; a specific obligation on tenants to carry out energy efficiency improvements to bring the property up to the required MEES standard; general service charge catch-all provisions enabling the landlord to recoup the costs of any energy efficiency improvements under the service charge regime; landlord rights to break leases where allowing the lease to continue would breach the MEES legislation.
Tenants should be aware that landlords will be seeking to pass on costs arising from compliance with the MEES regulations and should seek to cap leasehold liabilities for environmental initiatives wherever possible. Tenants should also be reviewing EPCs for their properties as from April 2018 it will not be possible to assign a lease that is below the minimum E standard unless consent from the landlord to carry out improvement works to bring the premises up to the minimum E standard is withheld or the cost of the works is prohibitive (i.e. the works would not pay for themselves within a period of seven years). In addition, leases should be reviewed as tenants may be caught out if landlords are able to include any works required under the MEES regulations as part of a dilapidations claim at the end of the lease.
Going forward it is clear that environmental initiatives, and particularly works required under the MEES regulations, will form an important part of lease negotiations, and EPCs will form an even more crucial part of the due diligence exercise when undertaking any property transactions.