Understanding Minimum Energy Efficiency Standards (MEES)
MEES regulations came into effect in April, and all landlords in England and Wales must sit up and take notice.
How to comply with energy ratings for the commercial and residential property sector.
Landlords and owners of commercial and residential properties can no longer let a new lease or renew an existing one if the property’s energy performance certificate (EPC) is below the minimum standard rating ‘E’. This is in accordance with the latest Minimum Energy Efficiency Standards.
How the regulations apply
The regulations are being applied in two stages:
Stage 1: Since 1st April 2018, all applicable properties must be improved to a specified minimum energy efficiency standard (EPC rating E) before they can be lawfully let to tenants.
Stage 2: From 1st April 2023, where a lease is already in place, a landlord should not continue to let to a tenant a property with an EPC rating lower than an E rating.
Leases affected by the regulations include:
- Most leases granted for a term of more than 6 months but less than 99 years.
- Some leases of less than 6 months may be caught by the regulations where the tenant has previously been in occupation, or has a right to renew or extend the term.
Other properties may fall outside the scope of the regulations where EPC certificates are not required for that type of property. This could include properties without heating, air conditioning or ventilation equipment, and some listed buildings.
For each case, landlords may not have to comply with the regulations if they meet the criteria of the following three main exemptions. All exemptions need to be registered in a central database to be valid and they only last for a maximum of five years.
1. The seven-year test
Landlords need to show, through an independent energy assessor, that no relevant energy efficiency improvements can be made. Alternatively, they need to show that all relevant improvements have been implemented already. For an exemption to be justified, improvement works will only be deemed relevant if the resulting energy bill savings are cost-effective over no more than seven years. These savings must be equal to or greater than the cost of the improvements.
2. Inability to obtain third party consent
A landlord may be exempt if they have been unable to obtain the consent of the tenant or a third party — superior landlord, mortgagee, planning authority — to undertake relevant improvements, despite their reasonable efforts within the preceding five years. Landlord guidance indicates that an exemption based on failure to obtain a tenant’s consent may not last five years, as it will expire when the tenancy is assigned or terminated.
3. Devaluation of the property
An exemption may also be granted if an independent assessor’s report within the preceding five years confirms that any relevant improvements would result in a devaluation of more than 5% of the market value of the property.
Implications and financial penalties
Guidance makes it clear that exemptions claimed by a landlord will not pass over to a new landlord who subsequently acquires a property. The purchaser of the property will need to re-assess whether any exemptions apply, obtain the appropriate evidence, and re-register. This is a critical point for due diligence on property transactions. It is also why landlords should consider whether it is more commercially viable to undertake improvement works, rather than trying to take the exemptions route.
The minimum penalty for non-compliance with the regulations is between £5,000 and £10,000. The penalty is calculated using either 10% or 20% of the property’s rateable value, up to a maximum cap of £150,000. The higher rateable value will be used to calculate the penalty where the breach has been in existence for more than three months at the time a penalty notice is served.
Essential steps to MEES compliance
If, as a landlord or property owner, your business is affected by MEES, there are three fundamental steps you can take to better understand how you are impacted.
1. Review the status of your EPC portfolio
- Do you have one for each of your properties?
- Are the portfolios up to date and valid?
- What are the portfolio ratings?
2. Confirm the status of your leases
- What is the setup of your tenancies?
- When are they due for renewal?
- Where might you be granting new leases?
3. Prioritise your property improvements
- Determine relevant improvement works to buildings that currently have EPC ratings of ‘F’ and ‘G’
If your properties require an energy assessment to prove compliance, it is vital you consult with an expert energy assessor. This will help identify opportunities to improve the energy efficiency of your buildings, and allow you to prioritise energy-saving measures that will provide the greatest returns.
Short-term exemption or long-term upgrade?
Here at Centrica Business Solutions, we believe that it will often be more effective spending time and money undertaking a smart upgrade on a building, rather than jumping through hoops to benefit from a short-term exemption. After 1st April 2023, landlords will not be able to continue letting an existing property with an EPC rating lower than an E rating anyway.
There are, of course, costs associated with carrying out energy efficiency works. Nevertheless, depending on the provisions of the tenancy lease, these costs could very well be recoverable.
To find out more and MEES, and to better understand what improvements you can make to your properties, get in touch today.