MEES: a guide to the minimum energy
efficiency standard for commercial buildings A guide for
landlords, investors, developers and lenders on the new
legal standard for minimum energy efficiency and requirement
By ACI Reports | Category:
From April 2018, a new legal standard for
minimum energy efficiency will apply to rented commercial
buildings. The new legal standard brings threats and
opportunities for landlords, freehold investors, developers
and lenders. Importantly, actions are needed in respect of
obtaining and understanding the EPC grades of building
Our briefing explains how the new legal
standard will work, the impact it will have on landlords,
freehold investors and lenders, the penalties for
non-compliance and steps that you should take now to
What is the minimum energy
efficiency standard (MEES) and EPC?
From 1 April 2018, landlords of buildings
within the scope of the MEES Regulations must not renew
existing tenancies or grant new tenancies if the building
has less than the minimum energy performance certificate
(EPC) rating of E unless the landlord registers an
After 1 April 2023, landlords must not continue to let any
buildings which have an EPC rating of less than E unless the
landlord registers an exemption.
Why is the
government introducing MEES?
built environment has been identified by government as a
major contributor to Greenhouse Gas (GHG) emissions and thus
poses a threat to the UK meeting its carbon reduction
targets for 2020 and 2050. Government estimates that 18% of
commercial properties hold the lowest EPC ratings of F or G.
While Building Regulations ensure that new properties meet
current energy efficiency standards, MEES will tackle the
UK's older buildings.
It is important to note that
the minimum standard could rise in future.
Which buildings and tenancies does MEES apply to?
Working out if a building and tenancy are
caught within the scope of MEES is not always
MEES does not apply to:
buildings which are not required to have an EPC: such
as certain industrial sites, workshops, non-residential
agricultural buildings with a low energy demand, 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
Determining whether a building and tenancy are
within scope requires owners to look at two sets of
regulations: Energy Performance of Buildings (England and
Wales) 2012 and the MEES Regulations. The interplay of the
regulations is complex and creates some potential loopholes.
The government's Guidance for Landlords (PDF) provides
explanations of how MEES will apply in particular
circumstances such as leases of part of buildings.
What are the exemptions?
Landlords can let a building to which the MEES
Regulations apply but which is below the minimum standard if
any of the exemptions apply. These are:
Rule: where an independent assessor determines that all
relevant energy efficiency improvements have been made to
the property or that improvements that could be made but
have not been made would not pay for themselves through
energy savings within seven years. There are numerous
examples of "relevant" energy efficiency improvements which
include double-glazing and pipework insulation which need to
be considered; wall-insulation measures are not required
where an expert determines that these would damage the
fabric of the property.
Devaluation: where an
independent surveyor determines that the relevant energy
efficiency improvements that could be made to the property
are likely to reduce the market value of the property by
more than 5%.
Third Party Consent: where consent
from persons such as a tenant, a superior landlord or
planning authorities has been refused or has been given with
conditions with which the landlord cannot reasonably comply.
Exemptions must be registered on the central government
PRS Exemptions Register.
The exemptions are valid for
five years only and cannot be transferred to a new landlord.
What are the penalties for non-compliance?
The MEES Regulations will be enforced by Local Weights
and Measures Authorities (LWMAs). LWMAs will have powers to
impose civil penalties which are set by reference to the
property's rateable value.
The penalty for renting
out a property for a period of fewer than three months in
breach of the MEES Regulations will be equivalent to 10% of
the propertys rateable value, subject to a minimum penalty
of £5,000 and a maximum of £50,000. After three months, the
penalty rises to 20% of the rateable value, with a minimum
penalty of £10,000 and a maximum of £150,000.
Where a property is let in breach of the MEES Regulations or
where a penalty is imposed, the lease as between the
landlord and the tenant remains valid and in force.
What are the threats and opportunities for
landlords and what should they do now?
Landlords are likely to be the most
affected parties because the key obligations and
restrictions in the MEES Regulations fall on them.
The most obvious threat to landlords is the financial cost
of upgrading non-compliant buildings and the potential loss
of income if a property cannot be rented out.
provisions in existing leases may affect the statutory
obligations of landlords under the MEES Regulations and may
affect the position of the Landlord in dealing with the MEES
Regulations. For example:
for a landlord hoping to
delay compliance for as long as possible, standard leases
may not contain sufficient restrictions on tenants
subletting which could trigger the landlord's obligations
lease provisions on service charges, yielding-up,
statutory compliance and rent reviews may not allow a
landlord to recover the capital expenditure required for
improvements from the tenant
for a landlord looking
to make improvements, the landlord's rights to enter may not
extend to entry for installing energy efficiency
improvements or there may be restrictions in a headlease to
There are, however, opportunities for
landlords to engage with tenants to enter green leases where
the environmental management and costs of the property, such
as energy efficiency improvements and utility bills, are
shared for the benefit of both parties.
also opportunities to explore the potential to increase
rental and asset value through making energy efficiency
improvements and combining these with other refit upgrades.
Landlords can prepare now by:
auditing their portfolios to understand
which properties are within scope of the MEES Regulations
and whether exemptions might apply
energy assessments to check whether the EPC ratings for
their properties are correct, understanding what work needs
to be done, and the least cost route to increase EPC grades.
understanding how lease terms, break dates,
renewals dates and planned refit periods fit with the MEES
reviewing their leases to
understand their rights.
What is the impact
on freehold investors and developers and what should they do
Freehold investors who own
reversionary freehold assets will not be landlords for the
purposes of the MEES Regulations where the term of the
headlease is over 99 years. However, the MEES Regulations
will still have an impact.
The key issue for freehold
investors is that there is a threat of reduction in value of
any property assets which do not meet the minimum standard.
Further, freehold investors may struggle to find new tenant
landlords willing to sub-let a property if it means they
will need to carry out improvements.
On the other
hand, freehold investors with tenant landlords already in
place will benefit from having energy improvements made to
their reversionary asset paid for by the landlord tenant.
Freehold investors may themselves be landlords for the
purposes of the MEES Regulations where the term of the
headlease is less than 99 years (and therefore within the
scope of the MEES Regulations). Where a property has more
than one landlord, the question of which landlord is
required to pay for installing energy efficiency
improvements is likely to depend on the terms of the
Developers who own freehold assets
awaiting development could face similar issues to freehold
investors and could find that the timetables of their future
development programmes are affected by the MEES Regulations.
However, the MEES Regulations may also create opportunities
for developers through reducing the acquisition costs of
property below the minimum standard.
landlords, investors and developers can prepare now by
auditing their portfolios to identify which properties may
be within scope of the MEES Regulations and understanding
how the terms of the headleases and future development
programmes fit with the MEES timetable above.
What is the impact on lenders and what should they do
Lenders will also be affected
by the MEES Regulations.
There is a threat to lenders
where a building does not meet the minimum standard leading
to a reduction in value of their security and ability to let
the property thereby affecting the ability of a landlord
borrower to make repayments due to loss of rental income and
additional capital expenditure costs.
There is a
further threat to lenders where they take possession of a
property following default and become freehold investors or
landlords and, thus, subject to the MEES Regulations
In the absence of a government scheme to
provide finance for landlords, the MEES Regulations also
provide opportunities to lenders where landlords need to
borrow to bring their properties up to the minimum standard.
Lenders can prepare now by reviewing their lending
criteria and conditions to check:
whether they are
obtaining sufficient information on valuation of the asset
to; understand the impacts of MEES on their security,
correctly price the risk and cost of borrowing and enable
them to monitor the risk adequately
monitoring procedures need to be adapted to take account of
the potential risks; (e.g. mandating that EPC certificates
are provided by the borrower on all non-exempt lettings
and/or requesting borrowers undertake and provide an MEES
audit/strategy plan prior to the 2018 deadline)
whether the undertakings and representations in their
facility agreements provide suitable protections and rights
against borrowers who fail to comply with their statutory
obligations under the MEES Regulations.
What happens next?
On 30 June
2016, the government made changes to the law to release the
data held in respect of EPCs of commercial property. Making
this data publicly available in bulk is intended to
encourage the property industry to scrutinise and compare
the energy efficiency ratings of buildings more closely and
influence the decision making of tenants, landlords,
investors and lenders. From this, we are likely to see the
beginnings of the market response to the approaching MEES
Amendments in 2015 to the Energy
Performance of Buildings (England and Wales) Regulations
2012 now require local authorities to report to government,
on an annual basis, on enforcement activities undertaken in
relation to EPCs.
Brexit could provide the
opportunity to repeal the Energy Performance of Buildings
(England and Wales) Regulations 2012, which underpin the
MEES Regulations, because these implement the EU Energy
Performance of Buildings Directive 2010. Nevertheless, the
underlying policy for the MEES Regulations originated in the
UK not the EU and the MEES Regulations remain on the statute
books. Parties should therefore assume that MEES will apply
from 1 April 2018.
The government published its
Guidance for Landlords (PDF) on 23 February 2017. The
Guidance for Landlords is designed to help landlords,
freehold investors, lenders and enforcement authorities to
prepare for the MEES Regulations. We can supply interested
parties with a copy on request.
well-advised to get to grips with how the MEES Regulations
will affect their properties and the best strategy for
compliance and improving EPC grades. Failing to understand
the impact of the MEES Regulations on leases, lending
conditions and on purchasing properties could lead to
increased costs or non-compliance later.
Ltd undertake a service to provide an EPC, and follow this
up with the least cost route to improve the grade above the
This is a briefing paper and the
law changes regularly. Before taking any steps you should
consult with ourselves and possibly your lawyers,
particularly if leases are affected.
ACI Reports Ltd
Performance of Buildings,