MEES regulations: Energy wasting commercial buildings could be unlettable

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The Minimum Energy Efficiency Standards (MEES) Regulations come into force on 1 April 2018 – making it illegal to grant a new tenancy to new or existing tenants for privately rented commercial properties that fail to meet minimum energy standards.

From April 2023, MEES will apply to non-domestic properties where a lease is already in place and the property occupied. This applies even where there has been no tenancy renewal or extension, or new tenancy.

Any landlord flouting the new regulations will be subject to a fine of between £5,000 and £150,000.

MEES: key requirements

To comply with MEES, landlords must achieve an Energy Performance Certificate (EPC) rating of E or above (EPCs rate a property's energy efficiency on a scale from the most efficient A+ to least efficient G). Any buildings that fall below an E-rating will be referred to as 'sub-standard property'.

MEES applies to sub-leases, affecting occupiers or managed office providers who sub-let property and will be treated as the main landlord.

Properties with an EPC rating below E can still be marketed after April 2018, but the prospective landlord and tenant must agree to a package of energy efficiency measures to achieve compliance prior to the lease being granted. It is currently unclear whether landlords will be able to recharge the cost of energy efficiency improvements to tenants.

MEES will apply to England and Wales, while Scotland is subject to similar regulation. It is being introduced to shake up energy performance of non-domestic buildings, which account for 12% of the UK's greenhouse gas emissions.

The risks of non-compliance

It is estimated that up to 20% of all non-domestic buildings in England and Wales could have the least efficient  F or G EPC ratings, and that 19% have an E-rating, placing many building owners within scope of MEES.

Building owners who fail to comply with MEES face the obvious risk of financial penalties, but there's also the risk of being saddled with a commercial building that it's illegal to let, and the associated reputational damage. Tenants could also be forced to seek new premises.

Energy performance is likely to become more important in determining rental levels and sale values, and become a major part of the selection and due diligence process for potential tenants and purchasers. It will also affect the valuation of properties.

MEES exemptions

  • Buildings not required to have an EPC, e.g. places of worship
  • Leases of less than 6 months, but subject to a maximum of two consecutive leases with the same tenant
  • Leases of more than 99 years
  • Buildings where there would be no consent to carry out energy efficiency improvements
  • Where the energy efficiency improvements would cause a material net decrease in the property value
  • Where improvements wouldn't be able to pay for themselves within 7 years, or where all feasible work has been undertaken, but the property still remains rated below E.

Three steps to prepare for MEES

1.  Identify which properties in your portfolio have an EPC and find out if they meet the minimum rating.

2. Identify what improvements are required. It would be advisable to re-examine existing EPCs in light of stricter modern standards

3. Carry out improvements, if required. 

About Richard Smith

Richard Smith

Richard Smith is the Director of Business Strategy at Inprova Energy, where he leads energy and water management services across the private and public sectors. 

His career in the energy management, building controls and FM sectors spans more than 25 years, including senior roles at Mitie, Veolia, Honeywell and Balfour Beatty.

Inprova Energy is one of the UK's top ten business energy procurement and management consultancies – specialising in energy and water auditing and management, business energy purchasing and analysis, carbon reduction and reporting, and legislative compliance. Its chartered advisers are qualified ESOS Lead Assessors, and certified to deliver Carbon Trust Standard, ISO 50001 and carbon footprint measurement services.

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By DJKL
17th Oct 2017 12:01

So, what does this mean? We have been anticipating this for a while, albeit we are in Scotland so different legislation.

Basically those buildings we own leased to business entities (our entire portfolio) that are uneconomic to upgrade (most) will over time stop being commercial space , will get planning for housing, will get demolished, and the supply of smaller city business space will continue to erode. (there is not much left)

Fine, we are all more energy efficient, great sentiment, until smaller inner city office etc rents skyrocket due to reduced supply, eventually market equilibrium occurs but sorry, you will all be paying a fair bit more in rent because of this legislation.

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to DJKL
18th Oct 2017 13:21

This new MEES legislation only applies in England and Wales.
The Scottish Government has a new legislation which is : The Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 No. 146.

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By DJKL
to Richard_Smith
18th Oct 2017 19:28

Yes, we have a more benign regime, the catch is if one part of UK brings in more rigorous regime other parts in due course tend to follow suit. Look at Land & Buildings Tax and the leapfrogging effect.

A lot of tertiary commercial property is frankly uneconomic to make compliant, and of course it tends to be older so nearer centres of towns and cities- if one lives in a city with a lot of heritage/listed properties, like Edinburgh, then eventually you are forced to build flats rather than support business. We have over 100 commercial property tenants plying their trade in some pretty old properties.

The catch is politicians do not think everything through, if the workforce lives in the centre but business is by such measures pushed to compliant newer properties on the fringe, what is the climate change impact of all the employees travelling back and forward to work, that bit is ignored as they blindly chase building targets that are, overall, post COP21, pretty poorly defined and pretty poorly measured. (My daughter has a degree in sustainable development, her dissertation was connected with NCDs and their setting and success measurement issues re these, Iseem to have picked up a little knowledge (dangerous) through her writing process)

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18th Oct 2017 09:09

Is this applicable throughout the UK, or is it a devolved issue? Based on DJKL's response I suspect the latter, in which case the liklihood of it applying to the ungovernable here in NI is slim.

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to Democratus
18th Oct 2017 13:30

The MEES only applies to England and Wales and as yet Northern Ireland does not have an equivalent of the Energy Act or the Climate Change (Scotland) Act.

There is a draft Climate Change Bill, which has a target to reduce greenhouse gas emissions by at least 35% by 2025 compared to 1990 levels.

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19th Oct 2017 18:19

My wife and I own the freehold of a very small farm in England the majority of which is leased to a modestly successful tourist attraction which earns enough to pay us a small rent, pay the operator's salary, keep everything in good repair, and show a very small profit. There is a total of 6 buildings including an open-sided roofed play area. I have been advised that every building must achieve "E" including the open-sided building and the unheated storage buildings, and when I have quoted provisions which suggest that not all the buildings do need to achieve this standard I have been told I am wrong. I knew this was coming so the lease makes the tenant responsible for compliance but the cost of the assessment for the EPCs would wipe out his profits for a whole year. There is absolutely no prospect of converting these converted agricultural buildings to modern energy standards - and only 3 of them have any heating anyway. If I can't find a solution to this problem the tenant says he will not renew his lease in 2021 and I will then have to demolish the buildings. I am desperately trying to find an EPC assessor who can at least explore the possibility of exempting some of these buildings, and who will do an EPC assessment for a reasonable cost, and if anyone can make any suggestions please contact me at contact1 (at) perrygrovefarm (dot) co (uk)
Thankyou.

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to C.Y.Nical
20th Oct 2017 14:01

Hi will send you an email with some supporting documents that may help.

Thanks

Richard

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to Richard_Smith
23rd Oct 2017 18:44

Thank you very much for your email. It appears that some of the information I had been given is just plain wrong! Compliance is going to be a big expense but I am beginning to see a way forward.
Since I started thinking about this I have been noticing a lot of commercial properties where compliance will be uneconomic. I suspect that a lot of owners of secondary investment property are going to get a nasty shock.

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By DJKL
to C.Y.Nical
25th Oct 2017 11:54

Exactly, before we got our actual legislation up here, when it was all mere discussion points in Holyrood and industry reports, we had a look through our portfolio re the likely art of the possible.

We worked out that it was likely that at least three large properties we owned would have to have been demolished (uneconomic to improve) and new build flats built on these sites for resale. Most of the rest of the portfolio would likely have been salvageable, but we are still talking 50% of a commercial portfolio.

To date legislation here not as bad as feared, but am not holding my breath, I expect , at some time, it develops more teeth.

Maybe I should buy shares in companies that sell/apply insulation

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