As part of new legislation that comes into effect on 1st April 2018, Minimum Energy Efficiency Standards (MEES) will now be applicable to any commercial property that is offered to the market.
In essence what this means to Landlord’s and Vendor’s alike is that any property with an Energy Rating of less than an ‘E’ will not be able to be let or sell until this energy rating is improved as this will be deemed ‘unlawful’.
The use of Energy Performance Certificates (EPC’s) is nothing new in commercial property; they have been a requirement since 2007, meaning that any freehold sale or letting cannot proceed without such certification in place. However, whilst the EPC assesses the energy efficiency and carbon emissions of the property irrespective of the rating, up until now this has not necessarily been a barrier in securing a letting or sale.
In basic terms, the EPC produced for properties is a lot like the rainbow coloured charts displayed on white goods, cars and double glazing for example. The resultant graph provides an energy rating from A (most efficient) to G (least efficient) and is used to classify how efficiently the property retains and gains heat and the level of likely carbon emissions produced.
The energy efficiency of a property is correlated to the buildings fabric; when the property was built? how is it constructed? what materials have been utilised? Furthermore, within the building envelope there are obviously rooms or spaces that have an energy demand, for example this can be in the form of space or water heating appliances, air conditioning or lighting which are used in combination or isolation to heat, cool or light each space. Therefore, the performance of each appliance is closely linked to the fabric of the building and how well this either retains the heat or reduces the need to light or cool the space. As a knock on to this the more any appliance is required, the likelihood is that the level of carbon emissions will be increased.
Therefore, how these new regulations effect commercial property transactions is clearly that any existing building with an EPC rating below an ‘E’ will require capital expenditure to improve the fabric of the property or energy consuming appliances or in more extreme cases possibly both. Furthermore, these changes will also have a major impact on secured lending, rent reviews for properties with an F or a G and potentially dilapidations claims at lease end.
Clearly, such improvements will take time and come at an expense and therefore, rather than jeopardise any potential transaction it may be pro-active to ascertain the buildings existing EPC rating and ‘plan for the future’. These changes do not just affect properties being offered on leasehold/freehold basis for the first time, and in certain instances can apply to lease renewals. For those existing properties currently being marketed and falling short of the minimum requirement, now may be the time to retrieve the EPC and consider implementing some of the recommended measures to improve the buildings rating.
In summary the key changes are as follows;
- MEES due to be in place on 1st April 2018 require a commercial property in England and Wales to be brought up to a minimum EPC rating of an ‘E’ with those properties below this (i.e. with an EPC rating of ‘F’ or ‘G’) being termed ‘sub-standard’ in the regulations.
- MEES applies to new lettings and lease renewals. It is the responsibility of the landlord to ensure that a property is compliant with the MEES before any lease is granted (providing a valid EPC is legally required). In certain circumstances (generally where the landlord had no choice whether to grant the lease), there will be a period of six months after the lease is granted in order to comply.
- MEES only applies to buildings that require an EPC under current regulations, and does not apply to very short lettings or to lettings of 99 years or more.
- Landlords will be exempt from meeting the minimum ‘E’ rating’ for a period of five years should all cost-effective energy efficiency improvements have been carried out and after determining through a seven-year payback test, the minimum ‘E’ rating has still not been met.
- Landlords will be exempt for a period of five years, should consent to undertake works be refused from a third party (e.g. Local Authority) or an incumbent tenant, or if the implementation of measures would result in a devaluation of the property by 5% or greater.
- Exemptions from MEES are not transferrable to purchasers upon sale. In the instances where a non-compliant property is sold as an investment (i.e with a tenant in occupation), or in the case of receivership transferred to another lender, the new landlord will have six months to improve the property or seek to demonstrate that an exemption applies.
- All exemptions are to be self-certified and will require lodgement on a central Government register. Landlords are required to lodge evidence (free of charge) demonstrating their exemption from MEES. Exemptions must be registered before they can be relied upon and this information will be readily available to the public and will be used to enforce non-compliance.
- Penalties for non-compliance could be significant; penalties are largely based on the rateable value of a commercial property with a maximum fine of £160,000 (per asset) for non-compliance.
For more detailed advice on MEES and advice on both ensuring compliance and mitigating risk then speak to Chris Keogh on 01332 292825 or firstname.lastname@example.org