Minimum energy efficiency standards for commercial buildings

Business : Commercial Property

Minimum energy efficiency standards for commercial buildings

We are all used to seeing the Energy Efficiency rating on white goods and other appliances. However from April 2018, a new legal standard for minimum energy efficiency will apply to rented commercial buildings.

What are Minimum Energy Efficiency Standard (MEES)?

As part of the Carbon Reduction Commitment the government has introduced building regulation requirements for new buildings to meet current energy efficiency standards, whilst Minimum Energy Efficiency Standards have been put in place to deal with the UK’s older buildings.

What do MEES do?

Under the regulations if you are a landlord of a commercial building you will not be able to renew or grant a new lease or tenancy if the building  doesn’t meet the minimum EPC rating. This is currently set at E but may be subject to change. The building must be brought up to the minimum standard or above before it can be let.

What is caught by the new standards?

In many ways it is easier to confirm what is not caught by the regulations:

  • any buildings which are not required to have an EPC: including industrial sites, workshops, non-residential agricultural buildings with low energy demands, certain listed buildings, temporary properties and holidays lets.
  • buildings where the EPC is over 10 years old or where there is no EPC.
  • tenancies of less than 6 months (with no right of renewal).
  • tenancies of over 99 years.

Even if the building is within the scope of the  MEES Regulations there are certain exemptions:

  • Golden Rule: if an independent assessor concludes all relevant energy efficiency improvements have been made or that any improvements not made would not pay for themselves through energy savings within seven years.
  • Devaluation: if an independent surveyor concludes that the energy efficiency improvements are likely to reduce the market value of the property by more than 5 per cent.
  • Third Party Consent: where required consents for the works, from a tenant, superior landlord or planning authority have either been refused or granted with unreasonable conditions.

Exemptions are valid for five years and cannot be transferred to a new landlord. The government is setting up a PRS Exemptions Register on which exemptions must be registered to be valid. The register is due to go live in April 2017, although this may change!

Landlords: The biggest concerns for landlords are the combined financial cost of improvement works and the potential loss of income if a property cannot be let. There is some debate as to whether landlords can recover the costs of improvement works under the service charge or statutory compliance provisions contained in a lease. Much will depend on the exact wording of the lease, but the current view is that these should be met by the landlord.

Freehold Reversions: Reversionary freehold owners who have granted leases over 99 years are not directly responsible under the MEES Regulations. However their investment may be compromised as a non-compliant property is likely to suffer a reduction in value and there may be difficulties securing new Intermediary landlords.

Lenders: The MEES Regulations may also impact on the ability to obtain finance on a non-compliant building due to the reduction in value. In addition many funders may not lend as they do not want the risk of being caught by the MEES Regulations if they take possession of the property.

Whilst it is unclear post Brexit if the government will repeal the Energy Performance of Buildings (England and Wales) Regulations 2012, which underpin the MEES Regulations, these are still current law and are due to apply from 1 April 2018.

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