_MEES: A guide for landlords of commercial properties

MEES explained 

In England and Wales, under the new legislation, from 1st April 2018 any commercial property that has an EPC of lower than an ‘E’ cannot be rented out to new tenants, or renew any existing tenancy contracts until at least an ‘E’ rating is obtained. From April 2023, MEES will apply to all existing commercial leases. 

Will I be liable to pay a fine? 

If a landlord continues to let a property in breach of MEES for up to three months, they will face a fine of 10% of the property’s rateable value, up to a maximum of £50,000. Letting out a non-compliant property for longer than three months will result in a fine of 20% of the property’s rateable value (capped at £150,000).

Are there any MEES exemptions?

There are some exemptions that which will enable a landlord to let, or continue to let, a substandard property:

• A property can be exempted if it is found that efficiency measures would decrease the property’s value by 5% or more
• ‘Seven-year payback test’: you will only be required to make energy efficiency improvements that have an expected payback of seven years or less. However, many measures are likely to meet the payback test. Lighting retrofit programmes, for example, or building control systems, can typically deliver savings well within the seven-year timeframe.
• A temporary exemption of six months can be granted to new landlords

The number of properties in England and Wales with Energy Performance Certificate (EPC) ratings of F or G estimated to be between 200,000 and 300,000.  

Landlords who currently think their properties are compliant may find that upon renewal of the Energy Performance Certificate for their buildings that they are no longer compliant and therefore unable to rent out their properties.

What should you do to improve the EPC rating for commercial property?

If F or G rating, landlords need to take immediate action to improve rating. Knight Frank recommends:

• Contacting an expert in MEES to review your building or estates portfolio
• Getting updated EPCs for properties that could be at risk and in relation to new or renewal of tenancies to assess current and future risk
• Do not just consider the risk for properties with EPCs rated F or G; you should also include those rated E and even D in the analysis as upon renewal of the EPC the new rating could be worse
• Do not just rely on exemptions and be aware of the risk of inaccurate EPCs
• Plan your refurbishment projects taking due consideration of MEES
• Take a long-term approach, from 2023 this will also affect any existing tenancies and regulations could be tightened up in the future to capture buildings with other ratings

Landlords who introduce measures to improve the energy rating of buildings beyond the minimum requirement could enhance the relative rental value of their assets on the open property market.

Not only will a more energy efficient building will save on energy costs, it will also result in more comfortable buildings; while research has shown it also improves attention and productivity in schools and offices.

How can Knight Frank help? 

Knight Frank can help you become MEES compliant by assessing current energy efficiency and energy performance risk across your portfolio and for individual assets.

This includes creating a bespoke risk management plan (“Energy Efficiency Plan”) for your buildings to implement any necessary energy efficiency improvements, aligned with the building life cycle. The Energy Efficiency Plan will include fully costed investment grade proposals for achieving the minimum standards required.

When necessary we will negotiate with landlords/tenants regarding the completion of energy efficiency projects and procure and manage any necessary improvement works.

Once all of the work have be carried out we will provide energy performance reports and ratings for statutory compliance and for marketing purposes.

Case study

We recently worked with a major landowner with 35+ buildings in central London comprising mixed used properties, primarily office and retail. Over 100 individual EPCs for offices and retail units were subject to the new legislation. Knight Frank's Energy took the following steps to ensure compliance: 

Review 

Knight Frank carried out a review to assess the ratings and expiry dates of all active EPCs across its entire portfolio. We took the approach of defining assets as ‘at risk’ where EPCs were classified below D and/or expiring before 2019, and where the lease is coming to an end before 2019. 28 units were identified as being at risk.

Assessments

Knight Frank completed new EPCs for the 28 units at risk. An energy efficiency plan was then put in place including fully costed investment grade proposals for achieving the minimum standards required, aligned with the building life cycle.

For assets where EPCs were below D, an EPC improvement report was completed in order to identify energy efficiency opportunities.

Project management

A £115,000 investment requirement was identified, mainly in lighting upgrades and Knight Frank's Sustainability team  appointed to procure and manage any necessary improvement works using tenancy voids to carry out works.

Review of standard lease wording 

In addition to all the work at property level, we advised the client on how to amend their standard lease wording in order to ensure that tenants maintain the target of an EPC of D (100) or above in all areas of the building (including demised space) and prevent works which could have a detrimental impact on the EPC rating.

Benefits

Once works have been completed by end of 2019, the portfolio will be 100% MEES compliant. This means that the asset is protected in the long term and rental income is safeguarded as 'rentability' is enhanced.